JUNO Investing Spring 2017 by Informed Investor

we simplify investing

junoinvesting.co.nz

KiwiSaver Not all bonds are created equal SAFEES IN VE IN GE S AG AN DST STAG

Artificial Intelligence Rod Drury on new developments

201

7 IS

A - S

E 14

SPRI

Boost Your Income Airbnb, campers, and more

I N V E S TI

Are you SAFE? > GUARDING YOUR INVESTMENTS • • • •

How to spot a scam – p24 The benefits of insurance – p37 Avoid investing mistakes – p42 Know your home’s true value – p56

9 772422 894000

SPRING 201 2 017 ISSU E THIR FOURTE WINTER 7 - ISS UE TEEEN N

NZ$9.95 INC. GST

Be in to Win at the Men’s Wealth & Wellbeing Event – p77

CC J L

CC J R

Our team invests alongside you At Pie, we eat our own cooking. That means, all our staff, directors and shareholders invest in the funds alongside you.

SunbrellaÂŽ is a registered trademark of Glen Raven, Inc.

Products shown, top: Marine Bean and Ottoman in Taupe. Left: Classic Canvas Weekender. Right: Glenorchy Merino Blanket.

COAST began as a specialist supplier to the exclusive superyacht market and continues to employ many of the materials and methods previously the reserve of luxury yacht-building. Our design process has concentrated as much on materials and construction as on aesthetics and style, to ensure that everything we make is not only enduring, but timeless. The award-winning Marine Bean® is the original outdoor beanbag and still the best. It has found a home ashore in 5-star hotels and resorts from Queenstown to the Maldives, as well as private homes, villas and beach houses worldwide. COAST invite you to view their range of luxury beanbags, natural textiles, canvas luggage and leather accesories at our exclusive retailers across the country, including:

DAW S O N & C O . Waiheke Island

Parnell · North Shore

Christchurch · Queenstown · Wanaka Timaru · Dunedin

Mount Maunganui · Hamilton

Gisborne

Hastings

C OA S T & S U N B R E L L A : A N E N D U R I N G PA R T N E R S H I P At COAST we’ve been using Sunbrella® fabric for our products for over twelve years and our confidence in this amazing fabric increases year on year. Sunbrella® upholstery and marine/awning fabrics are guaranteed for five years against fading and deterioration –and our own experience shows that they can be expected to last for much longer. Sunbrella® is a must for outdoor furnishings, shade and is also highly recommended for interior applications such as window seats, curtains and blinds.

YEAR

warranty

77 Ponsonby Road, Auckland

Sunbrella® fabrics are made to last and backed by a 5 year warranty. Our own experience shows Sunbrella® can last much longer.

coastnewzealand.com

info@coast.co.nz

GREAT KITCHENS DONâ&#x20AC;&#x2122;T JUST HAPPEN... THEY HAPPEN BY DESIGN.

NEWMARKET SHOWROOM: 7 Melrose Street, Newmarket | 09 379 3084 TAKAPUNA SHOWROOM: 3 Byron Avenue, Takapuna | 09 488 7201 kitchensbydesign.co.nz

N A E N OP PU W KA O TA O N I UD ST

SPRING 17

ISSUE FOURTEEN

He may be well-dressed, well-spoken and have a great investment to offer you, but can he be trusted?

CONTENTS YO U R I N VES T I N G PERSONAL FINANCE

Beware of the Wolf

Back from the Brink

Take Your Pick: Choosing the Right Adviser

Everything’s Going to Be All Right

Top Five Investing Mistakes (And Why We Make Them)

Not All Bonds Are Created Equal

Five Easy Ways to Boost Your Income

Tax Tips for the Age of Airbnb

He may be well-dressed, well-spoken and have a great investment to offer you, but can he be trusted? Martin Hawes explains how to invest safely. 28

When things go wrong, they can go really badly wrong – and you could be left facing bankruptcy. Amy Hamilton Chadwick looks at what you need to do to survive a financial disaster. 32

When you put your money in the hands of an adviser, how do you know they can be trusted to do the best for you? Jack Powell explains how to tell the good advisers from the bad. 37

Bad things happen to nice people. And that person just might be you. Brenda Ward talks to the experts about why paying for insurance might help you sleep more soundly at night. 42

Back from the Brink

You could be undermining your best efforts to grow your portfolio. Caroline Ritchie looks at the five most common errors investors make. 48

If you have a KiwiSaver account, you’re probably invested in bonds. Their reputation as a ‘safe’ investment shouldn’t blind investors to the risks, writes Paul Gregory. 50

Empty bach? Paying for campervan parking? What you don’t need right now can be rented out as part of the ‘sharing economy’ to put money in your pocket. Amy Hamilton Chadwick finds out how to turn an asset into an investment. 52

With the shared economy growing, Kiwis renting out their assets may find themselves with increased tax obligations. Anand Reddy suggests some things to be aware of.

Top Five Investing Mistakes

What Your House Is Really Worth

Boomtown Stats

Charitable Giving: How Much Should You Give?

An Easy Way to Give

Xero Business: The Missing Millions

Xero Business: Smell the Coffee

Five Minutes with Sir Eion Edgar

JUNO and Continental Cars Men’s Wealth & Wellbeing Seminar

Stories of people selling their homes to shysters for less than their real value send a chill down a homeowner’s spine. But how can you find out the true value of your house? Brenda Ward investigates. 60

A review of the property market by Jeremy O’Hanlon of Homes.co.nz. 62

Thinking about your charitable giving as you would any other investment gives you freedom to prioritise the issues you care about over random requests for donations, writes Karyn Tattersfield. 68

Let your financial adviser take care of your investments for charity using a method of giving that’s new to New Zealand, writes Julia Capon. 70

What Your House Is Really Worth

A new wave of second-generation cloud accounting will utilise artificial intelligence and machine learning, says Rod Drury. 72

Al Keating shares his passion for Coffee Supreme. 74

Dunedin-born businessman and noted philanthropist Sir Eion Edgar. He shares his views on trust, success, and what to do when investments go wrong. 76

Book now for this inspirational event with speakers fund manager Mike Taylor, health professional Dr Tom Mulholland, and entrepreneur Dion Nash.

Smell the Coffee

YOU R I N VES T I N G M A R K E T I N S I G H T S for the sophisticated investor

Chart Review: Battles in the Sky

Netflix has disrupted the satellite television industry, and the results have been spectacular, writes Mike Taylor. 100

Stocks on the Move

Snapshot

Agribusiness: Grass-Roots Investing

How to Manage Risk When Trading

Is Inflation About to Take off?

South Korea – Riches and Risk

104

Mark Devcich and Chris Bainbridge provide a backdrop to the rises and falls of four stocks on the Australian and New Zealand exchanges. 102

A glance at events affecting the global economy. 104

The resurgence of the New Zealand rural sector is good for producers, communities, and investors explains Jeremy Keating. 108

Having a risk-management strategy is essential in business. And in the fast-moving environment of financial markets, it’s even more important, says Chris Smith. 111

Agribusiness: Grass-Roots Investing

113

The world economy has been performing well but, contrary to the rules of economics, inflation has been low. Andrew Kenningham explains why it may stay low for a while, and how this leaves policymakers and households with a dilemma. 113

South Korea has a booming economy, plenty of innovation and improving corporate practices yet, on the face of it, its share market appears cheap. Victoria Harris looks at what’s going on there.

South Korea – Riches and Risk

78 The racing industry is fast-paced, volatile and exciting. But can horses also be a good investment?

YOU R LI FES T Y LE I

JUNO and Continental Cars Women’s Finance & Wellbeing Seminar

What We Like

Horses for Courses

A review of the Winter event.

The racing industry is fast-paced, volatile and exciting. But can horses also be a good investment? Annie Cooper talks to owners and investors about how to win. 84

How to Stress Less

Treasures of the Inca

Mediterranean Dreams

Essentials

Book Reviews

Subscribe & Win

Stress is the health epidemic of the 21st century, says the World Health Organization. Sarah Laurie found our biology causes it – but can also solve it. 86

The vanished Incan empire left behind a remarkable legacy, writes Ute Junker – its stunning cities, with the magical Machu Picchu as its most awe-inspiring. 90

A meal at Gerome in Parnell, Auckland, takes Brenda Ward back to a delicious shared feast in an orange grove in Greece. Plus the recipe for Gerome’s famous Loukoumades (Greek doughnuts). 92

Treasures of the Inca

Mediterranean Dreams

The cleverest, most colourful things expand from small packages to brighten your days, as the seasons change. 94

Sarah Ell reviews The Wizard of Lies: Bernie Madoff and the Death of Trust, by Diana B. Henriques; and Transition: How to Prepare Your Family and Business for The Greatest Wealth Transfer in History, by David Werdiger. 96

Subscribe and Win

How full will your trolley be when you retire? Only the Kiwi Wealth KiwiSaver Scheme has the â&#x20AC;&#x2DC;Future Youâ&#x20AC;&#x2122; tool. Join us and see how making changes to your KiwiSaver account today could make a big difference to Future You.

Visit KiwiWealth.co.nz

Kiwi Wealth Limited is the Issuer and Manager of the Kiwi Wealth KiwiSaver Scheme (the Scheme) and is a related company of Kiwibank Limited. Kiwibank is a distributor but is not an issuer or manager of the Scheme. The Product Disclosure Statement for the Scheme is available from kiwiwealth.co.nz KWB 4213/JUNOA

02.

PA U L G R E G O R Y

03.

A M Y H A M I LT O N CHADWICK

SPRI

7 IS

04.

E 14

MARK DEVCICH

201

01.

A - S

YOUR INVESTING CONTRIBUTORS

I N V E S TI

VICTORIA HARRIS

Mark is Head of Research at Pie Funds and has overall responsibility for research and company analysis. He is also the portfolio manager for the Emerging Companies Fund and the Dividend Fund.

Paul is the Director, External Communication and Investor Capability, at the Financial Markets Authority. He was previously with the NZ Super Fund, in communications and investment roles.

Amy specialises in property and finance journalism; she has been a writer and editor for almost 20 years. Amy is a former editor of NZ Property Investor magazine and is a registered financial adviser.

A Senior Analyst at Pie Funds, Victoria researches and analyses global companies. Before joining Pie Funds, Victoria was a Senior Analyst and co-portfolio manager at Milford Asset Management.

05.

06.

07.

08. J A C K P O W E L L

MARTIN HAWES

J E R E M Y K E AT I N G

ANDREW KENNINGHAM

Martin is the chairman of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and offers his services throughout New Zealand. He also presents at seminars.

Jeremy is a Director of CBRE Agribusiness, based in the Auckland office. Jeremy plays an active role in providing real estate strategy, transaction, and advisory services to Agribusiness clients throughout New Zealand.

Andrew has worked for Capital Economics since 2011. He was previously an economic adviser for the UK Foreign Office and worked for Merrill Lynch in the City of London.

Jack is a shareholder and investment adviser at Private Wealth Advisers Limited. Jack has over 20 years’ experience providing a full range of customised investmentplanning services.

09. A N A N D R E D DY

10.

11.

12.

Anand is a Partner in PwC’s Private Business practice, and has spent his career advising on tax and other important issues for both privately owned businesses and large corporate entities.

Caroline is the owner of Investment Stuff, a share-market-based investment coaching service. She has 13 years’ experience as a sharebroker, fixed interest, and portfolio manager.

CAROLINE RITCHIE

CHRIS SMITH

Chris is the General Manager at CMC Markets. He has more than 15 years’ investing experience, with a passion for the financial markets, and global equity, commodity, and forex markets.

M I K E TA Y L O R

Mike is the Founder, CEO, and CIO of investment company Pie Funds. He is the joint portfolio manager for Pie Growth, Pie Global, and Pie Growth UK & Europe Funds.

Behind your trade is a world of innovation, research and analysis Tune in to market opportunities with extensive insights from our global analysts and complimentary access to Reuters, Morningstar and our economic calendar.

Find out more at cmcmarkets.co.nz CFDs | FX | Binaries

With derivative products you could lose more than your deposits. You do not own or have any interest in the underlying assets. Investing in derivative products carries significant risks. Seek independent advice and consider our PDS at cmcmarkets.co.nz when deciding whether to invest in CMC Markets products. CMC Markets NZ Limited (CN 1705324).

PUBLISHED BY: Jacqueline Taylor

Editorial Director & Publisher Jacqueline Taylor – jacqueline@junoinvesting.co.nz Editor Brenda Ward – brenda@junoinvesting.co.nz Subeditors Sarah Ell Jo Hammer Art Director, Senior Designer & Digital Designer Rachel Lochhead – rachel@junoinvesting.co.nz Advertising Manager Rex Pearce –rex@thevalueexchange.co.nz Digital Communications Stephanie Munro – stephanie@junoinvesting.co.nz Designer Ashleigh Whitmore Executive Chairman Mike Taylor – mike@junoinvesting.co.nz Printer Crucial Colour Distribution Finely Finished Limited Retail Distributors Gordon & Gotch Mail Lodgement Marketing Impact

JUNO Investing Magazine, Level 1, 1 Byron Avenue, Takapuna, PO Box 33-1079, Auckland 0740

www.junoinvesting.co.nz JUNO is a financial-investment magazine published quarterly by Jacqueline Taylor. You need JUNO magazine’s written permission to reproduce any part of JUNO. Advertising statements and editorial opinions in JUNO reflect the views of the advertisers and editorial contributors, not JUNO magazine and its staff. JUNO’s content comes from sources that JUNO magazine considers accurate, but we do not guarantee that the content is accurate. Charts in JUNO are visually indicative only, not exact. The content of JUNO is intended as general information only, and you use it at your own risk: JUNO magazine is not liable to anybody in any way at all. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. JUNO magazine does not give any representation regarding the quality, accuracy, completeness or merchantability of the information in this publication or that it is fit for any purpose. To advertise in JUNO, you must accept JUNO magazine’s advertising terms and conditions. Please contact jacqueline@junoinvesting.com for a copy.

PRINT ISSN 2422-894X DIGITAL ISSN 2422-9741 www.junoinvesting.co.nz

PROUD PRINTERS OF JUNO MAGAZINE

24 Fairfax Ave, Penrose, Auckland Ph 09 589 1550

crucialcolour.com

E DITOR IAL

FROM THE EDITORIAL DIRECTOR & PUBLISHER

FROM THE EDITOR

At the Edge of a Cliff

A Hard-Luck Story

I LIKE TO THINK I’m a bit of a risk-taker. I enjoy stepping out of my comfort zone every now and then and taking on new challenges. And I’ve certainly clocked up an extensive list of adrenaline-fuelled activities I can now tick off my bucket list. On a recent adventure trip to the US, I decided to take on the challenge of abseiling down a 50-metre cliff – something I haven’t done since I was at a high-school camp! Looking down on the raging river and the tips of giant pine trees below, I considered pulling out. Taking deep breaths, I inched myself to the edge, leaned back into position, and began the descent. This story ends well. I am still here, so clearly I completed the challenge – but it wasn’t easy. I talked to myself the entire way down and remained focused on the job at hand, releasing the rope little by little, till my feet felt the ground below. The truth is, my confidence to do this activity came from the knowledge that if anything should go wrong – if I slipped, or the rope frayed, or even if I passed out – I was securely fastened to the guide above by a safety line. I would be safe. Despite the nerves, I had peace of mind knowing that someone I could trust had my back. It’s a bit like investments really. It’s important to have your ‘safety lines’ fastened too. For example, have you done due diligence on a fund? Is your adviser reliable? How will you protect your assets? These are all things to consider before making investments. But most importantly, can you trust the people managing your money? Trust is so important for investors – and misplaced trust is one of the biggest causes of investment losses. You may be familiar with American fraudster Bernie Madoff and Kiwi David Ross, and their Ponzi schemes. Investors lost a lot of money by putting their trust in them. But how do you decide who to trust? On page 24, Martin Hawes offers insight into how to spot a scam and provides a formula for investors to use to identify trustworthiness. This Safe Investing issue also provides a checklist for choosing an adviser, explains how to avoid the top five investment mistakes, and shares strategies for recovering from a financial disaster. In a volatile environment, keeping your investments safe is key. As great trader Paul Tudor Jones says: “Don’t focus on making money, focus on protecting what you have.” As always, I hope JUNO’s Spring issue leaves you educated, informed, and empowered, supporting you in making better financial decisions. Happy investing!

“YOU’RE WRITING ABOUT INSURANCE?” a colleague asked me, disbelievingly. “That’s going to be boring!” In fact, the story Everything’s Going To Be All Right, on page 37, was one of the most fascinating topics I’ve ever researched. It had all the elements of a great novel: neardeath, disaster, tragedy, recovery, and love. Insurance is a hard sell. Considered by some to be a lottery (if you live, you lose), and others as a luxury (if you can afford it, you don’t need it), you’re asking people to protect themselves from things they don’t think are ever going to happen. But they do. When I’d finished writing the case studies for my story, people kept asking me: “Where did you find all the people who had such terrible things happen to them?” A house fire, blindness, cancer, a potentially fatal virus in the Middle East. I knew all these people personally. I could see people thinking: “What a lot of bad luck your friends have!”, as they stepped back a metre or two. When I think of all the people I know, the ones who made it into my story are just a few of the cases where insurance could have made a life-changing difference. There are many others I didn’t include. There are those who had strokes in their 20s, testicular cancer in their 40s, a house destroyed by the Christchurch earthquake, a husband who tragically died when his kids were little. I nearly died myself, of a blood clot, in my 30s. In fact, a lot of people do have a lot of bad luck. Take a minute. Add up all the people you know who’ve been diagnosed with life-threatening illness, those who’ve had their car stolen, or lost a parent early, and it’s a very big number. Wealth isn’t just about accumulating ‘stuff’ and money. It’s about hanging onto what you have, and making sure you can have a happy financial future, even if a disaster happens to you. This is where insurance has a place in your portfolio. When you next buy a Lotto ticket, remember that your risk of permanent disability is higher than your chances of winning Powerball. An insurance policy works out to about the same price. For example, at 40, I’d be paying just $10 a week for $100,000 cover. Go on to www.Kiwibank.co.nz and check the calculator to see how much it would cost you.

We kindly acknowledge OUR PLATINUM SPONSOR

OUR GOLD SPONSORS

OUR SPONSORS & SUPPORTERS

we simplify investing

KiwiSaver Not all bonds are created equal S AFES E IN VD ESSTIN GES AG AN TAG

Artificial Intelligence Rod Drury on new developments

201

7 IS

E 14

SPRI

Boost Your Income Airbnb, campers, and more

A - S

A ND O U R W O N D E R F UL CO N T RI B UT O R S

junoinvesting.co.nz

I N V E S TI

Are you SAFE? > GUARDING YOUR INVESTMENTS

16 JuNO / SPRING 2017

Jack Powell Anand Reddy Caroline Ritchie Chris Smith Karyn Tattersfield Jacqueline Taylor Mike Taylor Brenda Ward

• How to spot a scam – p24 • The benefits of insurance – p37 • Avoid investing mistakes – p42 • Know your home’s true value – p56

NZ$9.95 INC. GST

9 772422 894000

Victoria Harris Martin Hawes Ute Junker Jeremy Keating Andrew Kenningham Sarah Laurie Jake Millar Jeremy O’Hanlon

S PRIN G 20 2 0 1 7 - IS S U E TH F OU RTEEN W IN TER IRTEEN

Chris Bainbridge Julia Capon Annie Cooper Mark Devcich Rod Drury Sarah Ell Paul Gregory Amy Hamilton Chadwick

Be in to Win at the Men’s Wealth & Wellbeing Event – p77

TROPHIES

AKARUA PINOT NOIR 2015 NEW ZEALAND CHAMPION PINOT NOIR 2016 New Zealand International Wine Awards 2016 AKARUA PINOT NOIR 2014 RED WINE OF SHOW - Six Nations Wine Challenge 2016 PINOT NOIR OF SHOW - Six Nations Wine Challenge 2016 BEST PINOT NOIR OF AUSTRALIA AND NEW ZEALAND - Winestate Magazine 2016 AKARUA PINOT NOIR 2013 CHAMPION PINOT NOIR - New Zealand International Wine Show 2014 CHAMPION PINOT NOIR - New Zealand International Wine Show 2015 AKARUA PINOT NOIR 2012 PINOT NOIR OF THE YEAR Winestate Australia & New Zealand AKARUA PINOT NOIR 2011 WINE OF SHOW • PINOT NOIR OF SHOW • NEW ZEALAND SUSTAINABLE WINE - Romeo Bragato Wine Awards 2013

GOLD MEDALS AKARUA PINOT NOIR 2015 • Royal Easter Show 2017 • Sydney International Wine Competition 2017, Australia (Top 100 & Blue Gold) • Sommelier Wine Awards, United Kingdom 2015 • Decanter World Wine Awards, United Kingdom 2015 AKARUA PINOT NOIR 2013 • 6 Nations Wine Challenge, Australia, 2015 • Decanter Asia World Wine Awards, China, 2015 • New Zealand International Wine Show 2015, Auckland 2013 • Romeo Bragato Wine Awards 2015, Hawkes Bay • China Wine & Spirit Awards 2015 (Double Gold), Hong Kong 2013 • New Zealand International Wine Show 2014, Auckland 2013 • Air New Zealand Wine Awards 2014, Hawkes Bay AKARUA PINOT NOIR 2012 • Sydney International Wine Competition 2014 (Top 100 Wine), Australia 2014 • 6 Nations Wine Challenge 2014 (Double Gold), Sydney • New Zealand International Wine Show 2014, Auckland • Spiegelau International Wine Competition 2014, Marlborough • International Wine Challenge 2014, United Kingdom • China Wine & Spirits Award 2014, Hong Kong • New Zealand Easter Show Wine Awards 2014, Auckland AKARUA PINOT NOIR 2011 • Global Pinot Noir Masters 2015, United Kingdom • China Wine & Spirit Awards 2015 (Double Gold), Hong Kong • Air New Zealand Wine Awards 2013, Auckland • New Zealand Easter Show Wine Awards 2013, Auckland • New Zealand International Wine Show 2012, Auckland • Romeo Bragato Wine Awards 2012, Hawkes Bay • New Zealand International Wine Show 2013, Auckland • Romeo Bragato Wine Awards 2013, New Zealand, Hawkes Bay 2012 • New Zealand Royal Easter Show Wine Awards 2015, Auckland AKARUA PINOT NOIR 2010 • New Zealand International Wine Show 2011, Auckland • Five Nations Wine Challenge 2012, Australia AKARUA PINOT NOIR 2009 • New Zealand Royal Easter Show 2011, Auckland • Five Nations Wine Challenge 2011, Australia

S TA N D I N G O U T M E A N S YO U C A S T A LO N G S H A D O W Our Akarua vineyards in Bannockburn provide us with the exceptional fruit that is destined for our flagship Pinot Noir. Since 2009, every single vintage of this special wine has been recognised with a trophy, a remarkable achievement for any wine and one which demonstrates the utmost care and attention that goes into crafting this outstanding Pinot Noir. See what all the fuss is about and give the latest vintage a try… available at Glengarry and other fine wine stores.

w w w. a k a r u a .c o m

WE KINDLY ACKNOWLEDGE

The JUNO and Continental Cars Women’s Finance and Wellbeing Seminar

CARS, MONEY AND LIFESTYLE The JUNO and Continental Cars Women’s Finance and Wellbeing seminar was a lively evening of top-notch speakers, networking, and bubbles.

SAVE THE DATE JUNO Exchange Tuesday 5 September

JUNO & Continental Cars Men’s Wealth & Wellbeing event Thursday 5 October. 18 JuNO / WINTER 2017

A full house of 120 women attended the event, at Continental Cars’ Auckland Audi showroom on 20 June. Retirement Commissioner Diane Maxwell spoke about her own financial journey, from spending up large on shoes and luxuries, to making smart financial decisions for her future. Maxwell said she was concerned that women were not adequately preparing for the challenges of retirement. They needed to overcome issues like being reluctant to ask for more pay and time out of the workforce, considering they’re likely to spend longer in retirement. Sarah Laurie spoke about her research into women and stress, and offered some simple tips for reducing the ‘fight or flight’ response in day-to-day life. Then entrepreneur Cecilia Robinson of My Food Bag explained how she went from being a rookie at starting up companies, to becoming a true leader, who can bring out the best in a team. She’s learning the value of investment since selling My Food Bag. JUNO publisher Jacqueline Taylor thanked the audience for attending and announced the winners of the prize draws. The next in this series is the JUNO and Continental Cars Men’s Finance & Lifestyle event on 5 October.

SUMMER 2016 / JuNO 19

EASY WHEELS Now you see it, now you don’t! The Brompton Folding Bike brings the convenience of an easy-to-transport bicycle to your city lifestyle. Its manufacturers say it’s small enough to tuck under your café leaner, or take on the train, yet big enough to extend into an adult-sized commuter bike. It solves so many transport woes that the JUNO team was intrigued, so we trialled a natty limegreen six-speed Brompton for a week. I picked up our speedster from Auckland’s Electric Bike Hub, where owner Maurice Wells gave me a quick demonstration, showing how easy it is to unfold and then pack back up in five easy steps. It was easy to carry and fitted neatly into my small car boot, but I wouldn’t like to lug it too far. Luckily, it’s generally used for cycling to and from public transport hubs, rather than being carried long distances. Serious weekend cyclist Lance Jones assembled it for the first time without instructions and in just a few seconds. His verdict: “It’s very nice to ride, very smooth.” He thought the gears were great and the assembly was a breeze. 20 JuNO / SPRING 2017

Inner-city paths and streets would be fine to navigate, he thought, but he wouldn’t recommend taking it off-road. Then our publisher Jacqueline Taylor took it for a spin, wearing high heels and a dress. This tough test proved it could hack the pace for a high-maintenance female commuter. Even with those handicaps, it performed like a standard bike, and was easy to ride and manoeuvre. The bike we were loaned came with a carry bag that snaps onto the front of the bike, for purses or purchases. Even with the bag on board, it still remained stable at our sedate speeds. Wells says he pedals from his store to the train with it, then packs it down for the trip home. At the station, he clips it back open and completes his journey. Waiting for your bus? When one wheel is folded back, it becomes a stable stand for parking the bike. It comes in two frame weights; several chic colours; four handlebar types; one, two, three, and six-speed versions; and with a range of bags. The model we trialled was the Brompton M6L in lime green, at NZ$2,445. The S-Bag is an extra $279. – Brenda Ward

W HAT W E LIKE

F R E E R ID E An exciting new venture is allowing business travellers to drive around in an electric car for a day – for free. Staff of companies enrolled in the new Electric Day Pass scheme can pick up a smart VW e-Golf from Europcar Rentals at one of New Zealand’s major airports in the morning, use it free for a day, then return it before their flight home. The scheme is a joint venture by VW, Europcar, and Auckland, Wellington, and Christchurch airports, to get decision-makers behind the wheel of an electric car. The goal is to have more Kiwis experience the benefits of sustainable driving first-hand. “People are increasingly aware of their carbon footprint and are taking a proactive approach to reducing it,” says Stephen Jones, general manager of Europcar New Zealand. “This is a natural next step for us as we evolve with the market and develop green-friendly motoring solutions.” The e-Golf runs like any other VW Golf with a “real driving range” of 150 kilometres. Says VW head of passenger vehicles Scott Kelsey: “It just has a power socket instead of a fuel cap.”

WHAT WE

HEAVENLY HI DEAWAY The Landing is one of New Zealand’s most exclusive retreats. Set on 400 hectares of pristine coastal land in the Bay of Islands, it has just four homes available for guests – all of which have been designed and detailed by renowned local architects Cheshire. Eighth Wonder Travel, specialists in high-end experiential travel, have put together a special weekend package at The Landing that includes two nights at The Boatshed Residence, located on the shores of the picture-perfect Wairoa Bay. Experiences included in the pacakge are a masterclass with resident chef Jacqueline Smith; an excursion on The Landing’s launch Iti Rangi; a wine-tasting hosted by The Landing’s vineyard manager, Keith Barker, in its extraordinary wine cellar; and an evening kiwi safari along the native bush walks. You’ll also be treated to a private dining experience, prepared by Jacqueline Smith at The Boatshed, where you will experience The Landing’s garden-to-plate philosophy and enjoy produce that’s hand-picked on-site, alongside the best that’s locally grown and made. For full details, go to www.eighthwonder.travel

To book a car using the scheme, go to www.europcar.co.nz/ electricdaypass. Companies register once for $150, then the service is free. Bookings are essential, 48 hours in advance.

SPECIAL WEEKEND PACKAGE

SPRING 17

ISSUE FOURTEEN

Safe 1 : free from harm or risk: unhurt 2 : secure from threat of danger, harm, or loss www.merriam-webster.com/dictionary/safe

SAFE INVESTING

“I’m always thinking about losing money as opposed to making money. Focus on protecting what you have.” Paul Tudor Jones

YO U R INV E STIN G

24 JuNO / SPRING 2017

PE R S ONAL FINANC E

BEWARE OF THE

WOLF He may be well-dressed, well-spoken and have a great investment to offer you, but can he be trusted? Martin Hawes explains how to invest safely.

WORDS BY Martin Hawes AFA, Financial Writer SPRING 2017 / JuNO 25

YO U R INV E STIN G

ALL INVESTMENT IS ABOUT TRUST. When you make an investment, you have to give your money to someone else. And when you do that, there is always a chance that you might not get it back again.

To invest, you have to trust a range of people: your advisers, your bankers, the person selling you an investment – and you even have to trust yourself, by trusting your own judgement. It’s very difficult to assess trustworthiness. Both Kiwi David Ross of Ross Asset Management and American fraudster Bernie Madoff gave every appearance of respectability, honesty and competence. But both proved to be running Ponzi schemes and many investors lost a lot of money.

but they will lower that amount to NZ$10,000 or NZ$5,000 if you’re not showing enough interest. 3. They need an instant decision – you must do it now, which gives you no time to think or take advice. Beware of any offer that has these features – there’s a good chance it is a scam designed to take your money.

What is trust? Trust is always the name of the investment game. Adviser Charles Green and former Harvard Business School professor David Maister have researched this area extensively , writing a book called The Trusted Adviser.

People who look the part, sound the part, and even act the part may not be worthy of your trust or your money.

These authors came up with a useful formula for explaining how to assess trustworthiness and decide who we should trust.

Trust really is the most important thing for investors – and misplaced trust is one of the biggest causes of investment losses. But how do you decide who to trust?

The formula is a fairly simple one and looks like this:

Who not to trust We all get unsolicited calls or emails from people trying to sell us ‘investments’ of some sort. These might be an email from Nigeria asking for our bank account number, with a US$5 million reward for you. These scams have been around for decades and have caught many people. Alternatively, it might be someone from the Philippines selling some ‘cheap’ shares in a stock that nobody has ever heard of. This stock is ‘on the move’ (“a major announcement will be made next week”) and you had better get in now to make your fortune. There are plenty of other ways these kinds of people will relieve you of your money – scammers are endlessly inventive. The people who fall for these kinds of scams are not just the naïve and inexperienced – all sorts of people, including high-profile businesspeople, have been ‘had’ by scams of all varieties.

What to look for There are three main features of investment scams: 1. They offer a very high rate of return. 2. The minimum amount you must invest keeps on reducing. When they first approach you, they may say the minimum amount to invest is NZ$50,000,

26 JuNO / SPRING 2017

(Credibility) + (Reliability) + (Intimacy) = Trustworthiness (Self-orientation) Trust is built on three factors: credibility, reliability and intimacy. The higher someone’s score on these three things, the more we trust them. However, as well as these three factors that build up trust, there is a very important factor which sharply decreases how much we should trust someone. That is called self-orientation. Note that the three things that build up trust are added together. Then, the total amount of trust generated by these three is divided by the perceived self-orientation of the person we are considering. To explain these four factors a little: - Credibility comes from whether the person has good qualifications and is experienced in their industry. - Reliability concerns whether they turn up on time or do as they promise. - Intimacy is judged on whether the person seems to care, and how secure we feel about trusting this person. - Self-orientation refers to how much the individual is orientated to their own position. This may relate to how they charge (hourly rate or commission), or if they appear to care more about what they get out of the transaction.

PE R S ONAL FINANC E

American fraudster Bernie Madoff gave every appearance of respectability, honesty and competence . . . but many investors lost a lot of money. Note that self-orientation is by far the most important factor. Someone who has a great deal of selforientation is unlikely to be well trusted.

How the formula works Here’s an example. Imagine you’re buying a house and the ‘property consultant’ is pointing out all its features and benefits. But do you trust her? The consultant comes from a large firm and has been with them for 20 years. She clearly knows the local market and so has good credibility. She has turned up on time and is well organised. She has brought along the LIM report, just as she promised. She scores well for reliability. She remembers your names and that you have two young children, is friendly but not overly familiar, and you are comfortable with her. She has a good score on intimacy. However, you know that the property has been on the market for a while and that the sole-agency period is running out. You also know that if you buy the property, the consultant stands to get a $20,000 commission. Her business model is self-orientated and so the amount you trust her falls accordingly. When you consider an investment, take this formula into account, and if you’re at all concerned, do some more research before trusting someone with your money.

DEFINITIONS P O N ZI S C H E M E : A fraudulent investment that relies on new investors to pay returns to older investors. When the new investors can’t supply enough money to pay the older ones, the scheme collapses. DAV I D R O S S : Kiwi David Ross ran

New Zealand’s largest-ever Ponzi scheme, which left more than 700 investors owed about NZ$115 million. In 2013, Ross was sentenced in the Wellington District Court to 10 years and 10 months in jail after an investigation by the Serious Fraud Office and the Financial Markets Authority. B E R N I E M A D O F F : American Bernie Madoff ran a Ponzi scheme that’s believed to be the largest financial fraud in US history. It is estimated 4,800 clients were defrauded of US$64.8 billion. Madoff was sentenced to 150 years in jail.

> To read more about Bernie Madoff’s Ponzi Scheme, see book reviews on page 94.

Martin Hawes is the chairman of the Summer KiwiSaver Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd. You can obtain the scheme’s product disclosure statement and further information about the scheme on Forsyth Barr’s website at www.summer.co.nz. Martin is an Authorised Financial Adviser and a Disclosure Statement is available from Martin Hawes on request and free of charge.

SPRING 2017 / JuNO 27

YO U R INV E STIN G

Back From the Brink When things go wrong, they can go really badly wrong â&#x20AC;&#x201C; and you could be left facing bankruptcy. Amy Hamilton Chadwick looks at what you need to do to survive a financial disaster.

WORDS BY Amy Hamilton-Chadwick Freelance writer and registered FA

28 JuNO / SPRING 2017

PE R S ONAL FINANC E

HOPEFULLY, you’re doing everything you can to protect yourself against financial disaster. But unexpected events can conspire to leave you floundering.

An investment gone bad or a job loss on its own might be manageable, but if someone in your family falls ill at the same time, or your marriage breaks down, you could be left in serious financial strife. It’s also possible you could be dragged into someone else’s quagmire; a partner or family member who

makes bad decisions can leave you with debts to pay. Once you’re in a financial hole, it can be difficult to know what to do. There’s often a sense of embarrassment that leaves you feeling reluctant to ask for help or tell other people about your situation. It can be both paralysing and isolating to feel as though you’re back at square one. The older you are when problems occur, the worse this feeling can be. But even if you never recover your former wealth, you can take steps to improve your financial future.

STEP 1: GET OVER THE GRIEF

STEP 2: ASK FOR HELP

STEP 3: LOWER YOUR STANDARD OF LIVING

The first stage of coping? “Get over the grief,” says Royden Shotter, AFA, certified financial planner and director of Echelon Advisers.

Be brave and ask for help – from the experts, be they Family Budgeting Services or professional financial advisers. An adviser will help you make a plan to get your life back on track and your debts paid off as fast as possible.

Some Kiwis are in hardship and genuinely can’t make any cuts, but Shotter says he sees more people who could spend less, but choose not to.

Accept that it will take time and hard work to claw your way back to a better position – and that there will be stressful periods and setbacks along the way. “There are some things you can’t control and you can’t worry about those. Focus on what you can do.”

“People do want to help, but often those in trouble don’t ask. You might be amazed at who will be willing to help you,” says Shotter.

“It’s our mentality that there’s a minimum bar for how we think life should be lived. If you’re starting again, can you move that bar a bit lower?”

SPRING 2017 / JuNO 29

YO U R INV E STIN G

“There are some things you can’t control, and you can’t worry about those. Focus on what you can do.” – Royden Shotter, AFA

STEP 4: CONSIDER YOUR HOUSE

STEP 5: PUT YOUR CAREER IN SURVIVAL MODE

STEP 6: PLAN AND PROTECT

Do everything you can to avoid being forced to sell your house, says Shotter, even if that means renting it out and downsizing or moving to a more affordable region.

Out of the workforce? Find a way back in. Already working? Look for ways to earn more.

As you gradually move out of the red and into the black, plan ahead to prevent another financial disaster, and protect the gains you’ve made.

If you do need to sell, get it over and done with, take the money and buy another house if you can – even if you need to change location. Ideally, try to own a no- or low-mortgage house as you approach retirement.

30 JuNO / SPRING 2017

Desperate times call for desperate measures. If your job doesn’t have strong future earning potential, can you take a sideways step into a different area? Could you earn more by going on contract and working longer hours? Will you need to work until you’re 70? When you’re in a financial pit, take a break from thinking about your career in terms of your passions and interests. You don’t want to be in a toxic environment or damage your health, but Shotter points out that sometimes, “it’s all about survival”.

Talk to your adviser, review your insurances, and think carefully about how you’re applying your money to debt and investment. “I like to think that people who’ve ended up in a disaster are more likely to be a bit entrepreneurial,” says Shotter. “Making mistakes is one thing. Not learning from them is the real failure.”

PE R S ONAL FINANC E

Recovering before retirement What are the main causes of insolvency? In the 2015/16 financial year, 3,871 New Zealanders applied for personal insolvency procedures. The top causes were: • unemployment or job loss

In 2007, Dan* was friends with a successful property developer. Every day he heard about properties being sold off-plan and resold for huge profits once completed. Dan bought four townhouses from his friend’s company, expecting to see impressive gains. But two years later, the tide turned. Some developments were abandoned, others liquidated, and those properties that were finished were worth less than he’d paid for them.

• ill health.

At the age of 55, Dan was staring down the barrel of insolvency, avoiding it by selling his house. He eventually bought another house in Auckland in 2014, but still struggled to pay the mortgage.

Administered corporate liquidations numbered 147 in 2015/16, down from 416 in 2012/13. The top causes of corporate liquidations were:

After some research, he found he could earn a lot more money in Australia. He sold his Auckland house, moved across the ditch and bought a less expensive property.

• failing to put money aside for taxation

Dan is now 63 and approaching retirement with the expectation of a mortgage-free home and a comfortable lifestyle.

• overuse of credit facilities • relationship breakdowns

• adverse economic conditions in the industry • having another business fail

It’s not the massive wealth he imagined when he bought his investment properties, but he successfully retrenched and recovered.

• legal action against the company.

* Not his real name

SPRING 2017 / JuNO 31

YO U R INV E STIN G

Take Your Pick:

Choosing the Right Adviser When you put your money in the hands of an adviser, how do you know they can be trusted to do the best for you? Jack Powell explains how to tell the good advisers from the bad.

WORDS BY Jack Powell AFA, Private Wealth Advisers

32 JuNO / SPRING 2017

YO U R INVE STING

SO, YOU’RE READY to invest your hardearned money and you’ve decided to seek professional advice. How do you go about finding the right type of adviser?

A little research can go a long way. You can gather a lot of information online about individual advisers, their firms, and their investment philosophy, so that’s a good place to start. Draw up a shortlist of people to review in more depth. First try company websites and LinkedIn to get an initial feel for what motivates the advisers. This will provide valuable insight into their investment views. If the firm doesn’t have an online presence, be warned: this is a strong red flag. A must-visit website is the Companies Office and its Financial Service Providers Register. Search for the adviser’s name there, and if they can’t be found, then it’s likely that they’re not registered to give financial advice. Referrals can be a good option. Ask friends and colleagues who they’ve been using, and how they’ve found the quality of advice and the level of service.

How much does it cost? Take a close look at how the adviser charges for their services. There are many different costs associated with investment advice. Advisers may charge a variety of fees, so it’s important that you understand all your options and all the costs associated with the advice you’re seeking. Your first meeting with any adviser should be free. In this meeting, you should get a clear understanding of the fee structure that will apply to any advice and services they offer. Here are some of the more common fee structures: Hourly fee: The adviser may simply charge you an hourly fee for their time. This can be a good option if you’re simply looking to have an adviser review your current situation, or if you just want some general guidance on how to achieve your goals, but are happy to arrange and manage the investments yourself. Plan-writing fee: As part of any engagement, there’s usually a plan-writing fee. This is usually charged to cover the time taken to prepare and present an investment proposal, known these days as a ‘Statement of Advice’. Some advisers will waive this cost if you move on to implement the recommended portfolio and become a client. Implementation fee: Some advisers charge a oneoff implementation fee simply to set up a portfolio. You’ll need to consider this carefully, because not all advisers charge it, and it may be negotiable.

PE R S ONAL FINANC E

Brokerage: Most share brokers are still paid by way of ‘brokerage’. Some companies do not agree with this fee approach, due to potential conflicts of interest, and it’s important you understand these fees in detail. I’d recommend you negotiate very hard on these fees, as they can vary from as low as 0.4 per cent up to 1 per cent, depending on the broker and the services you’ve agreed with them. Ongoing portfolio advice, management and administration fees: If you’re engaging an adviser to manage your investments for the long term, they’ll usually be compensated by charging you a percentage fee, based on the total value of the funds they manage. This fee can vary from 0.4 per cent a year to 1.5 per cent a year, and depends on many factors. After your first meeting, an adviser should be able to give you a general guide to the likely fees you’ll be charged. I prefer a capped administration fee – and for larger portfolios, you should consider this. This means the cost could be lower than quoted, but can never be higher. Advisers do have fixed overheads and compliance costs, so they should be open to a capped administration fee, especially for portfolios of NZ$5 million and above. I’ve seen some clients being charged hundreds of thousands of dollars for a service that’s no different from a NZ$1 million portfolio. I often wonder how this higher fee can be justified. Fee structure is an excellent topic to discuss with the adviser. Lastly, it is worth doing the maths to calculate the impact of the adviser’s fees on your likely returns. In a world of low interest rates, where you might get only 3 to 4 per cent yield from a local bond, an adviser who charges brokerage and/or an administration fee will be taking most of your return in fees. You might want to consider if this makes sense, when you compare it with the return on cash in the bank.

What does your adviser invest into? Don’t be shy about asking all advisers what they invest into. If they’re not investing themselves into the same solutions they’re recommending to their clients, it might be worth asking why that is, and where they are personally invested. This is something that I ask all the fund managers and investment professionals we work with. If they’re not substantially invested into their own funds, then why should we recommend them to our clients?

Your portfolio When you consider your adviser’s solution, you should ask: does it meet your needs and is it what you want? A lot of advisers in New Zealand have a restricted SPRING 2017 / JuNO 33

YO U R INV E STIN G

offering of investments they can recommend. You need to understand whether the adviser can offer only in-house products or has access to the entire market. Do they have an approved product list and, if so, how has that been compiled? It’s important that you get a good general understanding of the portfolio, and its expected performance, to ensure that it will meet your requirements. If you don’t understand anything the adviser says, don’t be shy to ask them to explain. It’s their job to advise you, after all. If an adviser can’t explain an investment to you in a way that you understand, chances are it’s not the right investment for you. Never invest into anything that you don’t understand.

A safe pair of hands You need to know the adviser’s level of experience in giving advice. Some advisers who are new to the industry may be very good at their role, but it’s important that you understand their skills to make sure they’re a ‘safe pair of hands’. In New Zealand, all investment advisers are required by the Financial Markets Authority (FMA) to be Authorised Financial Advisers (AFA). This is a musthave, entry-level qualification. Advisers who have studied further may be Certified Financial Planners (CFPCM), which means they have completed a Business Diploma in Financial Planning and have been mentored for at least two years by another CFP-qualified adviser, or they may hold a suitable alternative degree. But remember, when you consider the amount of time an adviser has been giving advice, more does not automatically mean better.

Experience counts A good test question to ask is whether the adviser has experienced a major correction in the markets and, if so, how did they manage their clients’ portfolios through that process. This is an important thing to understand. When the markets fall is when good advisers really earn their fees. Any adviser trying to sell their services solely on performance of investments raises a major red flag. This is something you’d expect from a green adviser. More battle-worn advisers know that past performance does not equal future performance, and there will be periods of outperformance and underperformance. This is simply the outcome of investing in a diversified way. Consider asking the adviser for references from a few existing clients. If they’re good at their job, they should have many clients who are happy to provide a positive 34 JuNO / SPRING 2017

reference for them. Just make sure the referee is not their mum or dad!

Why have a financial adviser? Maybe you already have an accountant and a legal adviser, and you can’t see the value in also having a financial adviser. So, how does an investment adviser differ from an accountant or a lawyer? Firstly, the investment adviser’s jokes are better. Seriously, when dealing with your financial planning, I recommend that the three parties – lawyer, accountant and financial adviser – all work together to provide you with the optimal solution.

If an adviser can’t explain an investment to you in a way that you understand, chances are it’s not the right investment for you. As an example of how you might use these professionals, the accountant is best qualified to confirm the optimal tax structure, the lawyer is best qualified to confirm the best estate structure, and the investment adviser takes these recommendations and uses them to craft the optimal investment solution.

A long-term relationship If you already have an adviser, are you comfortable with them? When you’re giving your funds to an adviser to manage, there is usually a minimum of a five-year commitment on your part, so you should be sure that you have a good working relationship with your adviser, and that you’re comfortable with their recommended solution. If you have any concerns at all, don’t be shy about bringing these up with the adviser. If you don’t understand their answer, ask again and again until you do. This is your money, so you need to be sure you understand what is happening to it. Your biggest protection will come from a good level of understanding of what’s being discussed, and your options. Put in a little work upfront and this will give you peace of mind about your investments. Ask lots of questions. No question should be off limits. This person will be looking after your life savings, so you’d better be able to understand and trust them.

Keeping your money safer. What to look for when choosing a broker. Investing with a broker will inevitably involve you sending that broker some of your hard earned cash. At that point, you are extending both credit and trust to a third party. How do you decide which brokers are worthy of your trust and funds?

One of the most common reasons for doing business with somebody in New Zealand is “because my mate said they’re OK". Recommendations play a big part in our decision making process but is that alone a compelling reason to open an account? The broker that your mate deals with may well be 100% reliable, trustworthy and regulated but unless you do your own due diligence, how can you be sure? So what are the essential questions that an investor should always ask? Regulation The first thing an investor must look for is, is this broker regulated? If so, by whom and under what jurisdiction i.e. are they regulated in New Zealand or offshore? If they are regulated off shore, you must ask yourself the question “If there is a dispute, do I have the will and/or the resources to fight a legal battle in a foreign jurisdiction?” If the answer is no, then a local broker might be a better option for you. Security of funds Next up you need to clarify the security of client funds. Where are my funds held? Are they easily accessible? Are they held in segregated client accounts and is the firm audited? Make sure that you are comfortable that your funds are kept completely separate to the firm’s own capital.

Important considerations: Regulation Security of funds Visibility of ownership

Visibility of ownership A Google search of brokers will bring up a plethora of slick looking websites, dig a little deeper and clarify exactly who are the owners/ directors and who are the key personnel. If you are unable to do this then beware.

Expertise Support Accessibility

FX Hedging & Payment Solutions

Forex

Equities

Futures

Expertise Reputable broking companies should provide details of the qualifications and experience of each of their advisers. Many brokers provide specialist services, and they have an obligation to ensure that their clients completely understand the nature and risks of these products. Support Does the broker provide access to trade ideas, reports and market information or are you simply left to trade on your own? Having access to market updates as they happen ensures that you are able to respond quickly to market movements. Accessibility How easy is it to contact my broker? Can I speak to someone if there is a significant market event outside of business hours? Do they provide an online platform that allows me to execute my own trades? Having 24 hour access to your broker, via a platform or dealing room, can provide peace of mind when navigating the financial markets. Operating in the financial markets requires experience, integrity and superior levels of service. Whilst your mate might be reliable, that doesn't mean his recommended broker is. By seeking the above information, you can feel confident that you’ve partnered with a broker that is accountable, and acts in accordance with industry regulations. OMF have been navigating the financial markets since 1987, and we are regulated under the Financial Markets Conduct Act. Contact us on 0800 863 325 or visit our website, www.omf.co.nz to learn more about our services and our regulatory environment.

Smarter strategies. Smarter platforms. Smarter trading. Connecting you to the global financial markets.

Wholesale

omf.co.nz

Power

Auckland 0800 863 325

Dairy

Wellington 0800 663 935

Carbon

Deal with us via our 24 hour dealing room or by using one of our market leading online platforms.

Disclaimer: Trading the financial markets can carry substantial risk and may not be suitable for every investor. You should consider whether certain financial products are right for your personal circumstances prior to making any important decisions. Please check our website for a full Risk Disclosure Statement.

YO U R INV E STIN G

What would you and your family do if your breadwinner couldn’t make dough? Our Life and Living Insurance calculator can help you to get an idea of how much it would cost you to get the cover you need.

To find out more, give us a call on 0800 222 491 or try out our Life & Living Insurance calculator at kiwibank.co.nz/life-calc Life & Living Insurance is provided by Kiwi Insurance Limited. Kiwi Insurance Limited is the only organisation responsible for claims under the cover. If you arrange your insurance through Kiwibank, you need to know that Kiwibank Limited doesn’t guarantee the obligations of, or any products issued by, Kiwi Insurance Limited. Kiwibank Limited may receive a commission on any insurance it arranges. “We”, “us” or “our” means Kiwi Insurance Limited. Important conditions and exclusions are set out in the Life & Living Insurance Cover Wording which is available at www.kiwibank.co.nz KWB4192

PE R S ONAL FINANC E

CONVERSATIONS ABOUT MONEY

In association with Kiwibank

Everything’s Going to Be All Right Bad things happen to nice people. And that person just might be you. Brenda Ward talks to the experts about why paying for insurance might help you sleep more soundly at night.

MOST PEOPLE think insurance is about having your car replaced when it’s stolen, getting a big payday when you fall sick, or what happens after you’ve passed away.

As a nation, we’re good at insuring possessions, but not ourselves. The study found that people will be happy to insure a $15,000 car, but often fail to insure their earnings potential, which could add up to several million dollars.

Yes, it can be all that – but insurance is also about managing your financial risk, says Massey University’s Dr Mike Naylor.

For example, your investment strategy could be wiped out overnight by illness or injury, says Naylor.

His department, the School of Economics and Finance, found that Kiwis are among the most underinsured people in the OECD countries, when it did a study for the Financial Services Council. And that’s a worry. “Insufficient insurance means there is insufficient protection against adverse financial events,” the study said.

Dr Mike Naylor Massey University Dr Mike Naylor is a senior lecturer at Massey’s School of Economics and Finance. He ran a research study on insurance in New Zealand for the Financial Services Council.

“Everyone thinks you’ll work till you’re 65, you’ll save a certain amount of money for retirement. And yes, a number of people do. “But some get to fifty, have a stroke – and they’ll never work again. Their whole investment plans are gone. You have to sit down and work through a number of scenarios.

Naomi Ballantyne Insurance pioneer Naomi Ballantyne is the founder of insurance companies Sovereign, OnePath and Partners Life. She was made an Officer of the New Zealand Order of Merit for her services to business.

Callum McPhail Kiwibank Digital Delivery Analyst Kiwibank’s Callum McPhail is also co-founder of Wicket, a start-up that aims to make insurance a priority for young people.

This article is intended as general information only. It does not take into account your financial situation and goals and is not personal advice. For advice about your particular circumstances please see your financial adviser.

Kiwibank was created to help Kiwis achieve financial independence. No matter where you are on your financial journey, we have products, services and expertise to help.

WINTER 2017 / JuNO 37

YO U R INV E STIN G

“It’s not about dying; it’s about living. It’s all about protecting income. Insurance is to provide this security if something affects your ability to generate an income.” – Naomi Ballantyne “If your back is broken, and you have to live in bed, what would you do? How would your life continue?” The FSC/Massey survey showed that New Zealanders have low levels of personal risk insurance, especially income, trauma, and total and permanent disability insurance. In fact, disability is statistically more likely than death in their working lifetime, says Naylor. “Our larger finding was that we have high rates of mis-insurance – people’s sums do not correspond to needs. This particularly applies to life insurance. Our life cover rates are appropriate, but cover sums do not relate to needs.” This puts more costs on our social welfare and health systems, costing us all more in taxes.

Too young to insure? There’s a real problem with young people not understanding the value of life insurance, says Kiwibank Digital Delivery Analyst Callum McPhail. He was part of a Kiwibank FinTech Accelerator team exploring the reasons why people his age, in their 20s and 30s, don’t get insurance. The project expected to find that younger customers were finding issues with online forms, says McPhail. But no. “The problem was even before they got to the application,” he says. “There was a breakdown in their not seeing a need for insurance – or knowing that they had a need for it, but never doing anything about it. They never found the time.” Those from 25 to 33 thought insurance was for older people, not for them. Digging deeper, many young people thought if they were injured and couldn’t work, ACC, social welfare, and the ‘Bank of Mum and Dad’ would care for them. Others didn’t trust insurance companies to keep their word. Some already had health issues and thought they’d be declined. Some thought they wanted $1 million worth of cover when they only needed $100,000. “But while you’re young, the payments are very low,” says McPhail. “Your risk of dying is much lower.

The benefit of going in now is that if you develop any medical conditions, you’re covered, but if you wait until you’re thirty to thirty-five, and a medical condition knocks you out, you’re not going to be covered for it.” The team also found, for young customers, that it isn’t about online forms – many people really need to address their concerns by talking to an expert.

It’s your earnings that count Insurance pioneer Naomi Ballantyne says people of all ages misunderstand insurance. “It’s not about dying; it’s about living,” she says. “It’s all about protecting income. Insurance is to provide this security if something affects your ability to generate an income. “It gets you to the same place after your ability to earn an income has been interrupted. The goal is to put you back to where you would have been.” She says if you’re injured or ill and can’t work, your partner may be caring for you and can’t work either. There are increased costs, you can’t take your family on holidays and you can’t afford to put your children through university. She says: “Givealittle is full of people who didn’t do anything to prepare. The others you don’t hear about – they had insurance, and it’s done the thing it was meant to do.” McPhail agrees. The Givealittle community pitched in to help one young man financially. “But the knock-on effect from that was that he couldn’t be seen out having a glass of wine, because people would say, ‘I thought they were in hardship’.” Naylor says personal risk insurance is more than buying insurance – it’s about taking steps to lower your risk and better survive an adverse event. No one likes to talk about death or disability, says Naylor, and this means they’re not protecting themselves, their families and their investments. But their cars are all right.

Kiwibank was created to help Kiwis achieve financial independence. No matter where you are on your financial journey, we have products, services and expertise to help.

PE R S ONAL FINANC E

HOW INSURANCE HELPS TRAUMA INSURANCE Trauma insurance policies pay a sum when you’re diagnosed with a medical condition, or have an accident. They don’t cover treatment, but cover costs like rehabilitation expenses or a drop in income. Most policies cover only major conditions, like heart attacks, cancer, stroke, coronary artery bypass surgery, and severe injuries leaving you paralysed, blind, or with severe burns. These policies aren’t linked to income, so they’re useful for non-earners instead of income protection, and to complement ACC cover.

It was just a routine check-up At 24, insurance agent Ali Aliev never thought he’d be calling on the insurance cover he sells to his clients. Like nearly all young men in their early 20s, Aliev was convinced he was bullet-proof. However, he wanted to lead by example, so he bought Trauma Cover, Household Expenses, and Private Medical Cover when he started in the business two years ago. Fit and healthy, Aliev went home to Uzbekistan for Christmas last year, where his mother insisted he should have a medical check-up. He was clear on all the screening tests, but then his cold hands made the ultrasound specialist suspicious. “Ali, are your hands always this cold?” “I don’t know, I haven’t really noticed,” he replied. The specialist felt Aliev’s throat and then passed the ultrasound over his neck to discover thyroid nodules. He had papillary thyroid cancer, which had spread to nearby lymph nodes, which needed to be surgically removed. “I was shocked,” says Aliev, “but then my mind immediately wanted to know, what is going to be the fastest way to recover from this so I can get back to my normal life?”

He researched his options. New Zealand was effectively shut for Christmas, so he opted to travel to South Korea where he could be treated by a world-recognised expert in thyroid cancer, and he could get his surgery right away. He came home to New Zealand in January for the next part of his treatment, radioactive iodine, continuing to work around the medical appointments. Aliev says he’s always been convinced of the benefits of insurance, “but now I’ve become an example myself, I’m passionate to my very core about the value I bring to my customers. “I’m determined to ensure that consumers, even the very young, appreciate that while the chances of something like this happening to them might be slim, the impact of having some protection in place if it does happen can determine the extent that your life is interrupted by it.”

LIFE INSURANCE If you pass away, life insurance will pay a sum of money to the beneficiary of your policy. Depending on the contract, it may also pay a sum if you are diagnosed with a terminal or critical illness. ‘Term life’ covers you for a specified term of years. ‘Permanent life’ is an older product, which remained in force until the policy matured and gave you a cash payout. It’s now rare.

Cheating death in Jordan Motoring website editor Alistair Sloane had always paid into a life insurance policy, with his wife and son in mind, but he never thought he’d get close to using it. “A few years ago, I was in Paris on a car-review trip when I started feeling dodgy. When we got to Jordan, it had turned really ugly, but I thought it was just a tummy bug. “Luckily, the doctor with us on the trip recognised it as a heart virus and he really saved my life. He gave me two pills costing $US250 each, which stopped the virus dead.” When Sloane returned to New Zealand, he recovered quickly. But when he was walking his dog in the park one day, he had chest pains. SPRING 2017 / JuNO 39

YO U R INV E STIN G

“The heart specialist identified straight away that I’d had a heart virus. He put in a stent and my heart returned to normal, but I was really exhausted for a while. “Then a few years later, when I was feeling good again, I went on a walking tour in Spain. When I got back, the surgeon checked me out and said I’d overdone it.” This time, the specialist was saying Sloane needed a coronary bypass. “Luckily, I’m pretty fit, so instead, I had two more stents put in. Now I’m good as gold. Luckily, I’m still here and I didn’t need my life insurance policy to pay out.”

TOTAL AND PERMANENT DISABILITY INSURANCE (TPD) Total and Permanent Disability policies pay out if you’re so disabled that you’re unlikely to ever be able to work at your occupation again. Normally they don’t pay out for partial disability. These policies tend to have low premiums, as the rate of permanent total disability is low. They’re often linked to life insurance, as an early payout of the life sum. They’re useful for covering the high costs of caring for a totally disabled family member.

When the world went dark Lawyer Kiran Valabh was just 24 and in his second year studying at university when he first started having eye problems. He had been diagnosed with the autoimmune disease lupus when he was 15. Lupus can affect many organs in the body. In his case, it attacked his kidneys. “They put me on me on intensive medication to treat my kidneys and this caused me eye problems called toxoplasmosis,” he recalls. “It was quite sudden. After a few months, both retinas detached from my eyes. Luckily, a surgeon was able to reattach the retina to the back of one eye, because it was still attached to the optic nerve.” He was able to return to his studies, although his vision was impaired. “But I continued to read, and that put a strain on my eyes. It was a rocky road for months, until in mid-1994, 40 JuNO / SPRING 2017

I lost practically all my sight. There was still some inflammation in the eyes, and in time, I lost the good eye and I became legally blind.” Some time later, he noticed some light perception in one eye, and had a cataract removed from it. He used his health insurance to have the eye operated on. It took him a year longer, but Valabh finished his degree and went on to work as a lawyer, mainly on projects. Later, the damage to his kidneys led to a transplant, within the public health system. Now 48, he still has light perception in one eye, but doesn’t feel confident to work full time. However he says, “I’m pretty good at navigating, I get around. I do things like reading and work, just differently from sighted folk.” He says he was grateful for the options health insurance gave him, but he’d never considered total and permanent disability insurance, which may have paid out in his circumstances. “It’s academic now . . . if I could tell the future, of course I would have had it.”

DISABILITY INCOME INSURANCE/INCOME PROTECTION Income protection insurance pays out if you’re unable to work due to ill health. Payouts are either a fixed monthly sum or a percentage of recent income, usually up to 75 per cent. There’s usually a waiting period and then the benefits are paid until you’re ruled able to return to work. These policies aren’t available to non-earners.

What about my daughter? Lesley* was part of the insurance survey Callum McPhail did for Kiwibank. When they met, she was a single parent with two adult children in Australia, and was working to support a younger daughter at home. She said she regretted not having got income protection insurance when she was younger, because it had become too expensive due to her age, and recent health issues. She told McPhail another reason was she didn’t want her children to fight about “who would get what” in case of any payout.

PE R S ONAL FINANC E

Says McPhail: “Then she told me there was something that kept her awake at night: ‘My daughter has severe autism and may never be able to work’.” It was an eye-opener, says McPhail. It's the people who really need insurance who often decide against getting it. * Not her real name.

HOUSE INSURANCE House insurance may cover repairs or rebuilding of your home up to your sum insured; full replacement house insurance for fire (aside from natural disasters); fixtures and fittings, decks, garages, fences, and most driveways; temporary accommodation if your house is too badly damaged to live in; and keys, locks, and remote door-access.

“What’s that smoke?” Hairdresser Courtney Low will never forget the day her grandmother’s kitchen caught fire. It all happened so fast. “I was at Nana’s house with some friends,” she recalls. The young people were all in the living room, when Low’s cousin suggested she put on a pot of oil to cook up some chips. “I said, ‘I’ll put them on, but you can finish them’, because I was getting ready for work. “I’d never put on an oil pot before. Not knowing, I set it going with the lid on it and we just forgot about it.” Then Low’s cousin called out: “What’s that smoke coming out of the kitchen?” “I got up and rushed into the kitchen to find the whole pot was on fire, and all the knobs for the elements were on fire too, so I ran back to tell everybody to get out. “When I went back in, it was so amazing how quickly the fire had moved. I’d always been told that, but you don’t really realise until you’re in that situation.” The flames had licked up the cupboards, melting all the knobs and handles. Her cousin’s boyfriend joined her and tried to put the fire out. Then she remembered what she’d been taught about fires. “I felt like I had to do something about it, because I was the one who put the pot on.”

Meanwhile, her friend was still in the kitchen. “The whole room was black and I couldn’t even see him, but he’d thrown the towels over it, and suffocated the flames.” By the time the fire brigade arrived, the fire was out, but the room was a blackened mess. All the food had to be thrown out, the stove was replaced and the cupboards were repainted. The smell lingered around the house for weeks. “It was terrible,” says Low. “Fortunately, the house was insured and the kitchen was repaired. Nana only lost the food we threw out.”

VEHICLE INSURANCE You can insure your vehicle against loss or damage from accidents, fire, or theft. For extra security, you can add extra full cover for the vehicle, and liability to damage to someone else’s vehicle; or everyday cover if you damage someone else’s vehicle, your car is stolen, or there’s a fire. Premiums are lower if you keep your car in a locked garage, or if you have an alarm.

The car’s gone! Julie* recommends you double-check the policy you’ve signed up for when you insure your car. You need to know what it covers – and what it doesn’t. When Julie went to get into her car after work one day this year, she found only an empty car park and some broken glass. Her Subaru Impreza, containing her toddler’s car seat and stroller, had been stolen. But there was worse to come. She discovered her insurance was third party only – it just covered her for accidents where a third party was damaged, and wasn’t the usual third party, fire and theft coverage. She was panicking; even with a replacement car she couldn’t collect her child from her carer without a car seat, or even dash to the corner dairy without the stroller. Fortunately kind workmates loaned her replacements.

She went into the laundry and found a pile of towels, which she tossed to him. He threw them over the fire.

When her car was found later, damaged, she had to pay to have it repaired. She was also surprised to find her contents insurance didn’t cover the car seat either, and she had to pay to replace that.

“Then I realised my Nana was still upstairs, sleeping.” She dashed upstairs and brought down her grandmother.

“Now I’ve got a new car and, for the first time in my life, I have comprehensive car insurance,” she says. * Not her real name. SPRING 2017 / JuNO 41

YO U R INV E STIN G

42 JuNO / SPRING 2017

PE R S ONAL FINANC E

Top Five Investing Mistakes (And Why We Make Them)

You could be undermining your best efforts to grow your portfolio. Caroline Ritchie looks at the five most common errors investors make.

WORDS BY Caroline Ritchie Owner of Investment Stuff SPRING 2017 / JuNO 43

YO U R INV E STIN G

1. FAILURE TO START, AND PROCRASTINATING This, in my view, is the biggest preventer of success with investing – and it’s obvious why. Other things can be sorted out later, such as whether you are in exactly the right fund or risk profile, or if you have a good adviser. But if you do not get stuck into a saving habit early on you hobble yourself at the outset. Why we put this off – and why we put anything off – is rooted in human behaviour. We will always prefer instant satisfaction to restricting things that are pleasurable. Start young being good with money and stick to your plan. Habits are easy to maintain once they’re ingrained, and saving is no different. It’s not a wildly exciting message, but it is the most effective thing you can do to grow your wealth over your lifetime. With few exceptions, it does not matter how much or how little you earn, there is always room for a slice of saving. KiwiSaver has helped millions in this regard, taking the pain out of tucking away cash for later. Many advisers recommend having KiwiSaver and setting up another savings fund as well. Run the two in tandem. That way you can have the long-term benefits of KiwiSaver, but also flexibility to use your other investments before the age of 65, if you need to. Put money into both from the minute you’re employed, and don’t stop.

2. CHASING MAGIC Once you’re on the savings runway, you want to see your lump sum start to grow. Or if you already have your retirement nest-egg in place, you start wondering about higher returns in this low-interest-rate environment. In either case, looking at different types of homes for your stash becomes interesting, as the potential pay-off (and potential losses) increase in value. It’s very tempting to fall into what I call the ‘lure of easy money’ trap. As with procrastinating, we are programmed to be greedy. In the Stone Age, this kept us alive, as we gorged on all the resources we could when they were available. Today, though, these instincts lead us into places where we shouldn’t be, such as investment scams. ‘Magic-seeking’ happens when you scour the landscape for returns that are too good to be true, then latch onto them, against your better judgement. Or, the people behind these dodgy schemes roam the landscape looking for you, and get you hooked. Investors at all levels need to cultivate a healthy level of scepticism. Don’t believe every glossy advertisement you see for high interest rates. Certainly never answer any unsolicited emails about investing, or lotteries, or gold-bullion trading, or binary options. The only people making the easy money here will be the crooks lurking in the dark on the internet.

It’s very tempting to fall into what I call the ‘lure of easy money’ trap. 44 JuNO / SPRING 2017

PE R S ONAL FINANC E

3. FALLING IN LOVE WITH CERTAIN SHARES

4. GETTING CAUGHT UP WITH THE HERD

This has been one of the top frustrations over my whole career: clients who are emotionally overinvested in one or two of their favourite shares.

The cycle of greed and fear is one of the first things investors are told to guard against. In fact, “Be fearful when others are greedy and greedy when others are fearful” is super-investor Warren Buffett’s best-known phrase.

This usually happens when the companies in question have performed far better than the rest in the portfolio. Often this is over many years, and the stocks are household names. Sometimes it’s because the client worked for the organisation for a long time and holds a large number of shares (sometimes their only shareholding). In both cases, there is a biased attachment. This can get hazardous, as the shares in question start to dominate the portfolio or, in the case of only owning one share, dominate your whole life. I know it’s impossible to be completely impartial about money, but I do urge investors to try. The phrase I use over and over is: ‘The shares don’t love you back!’ The second danger here is that you are, or you become, under-diversified. No one company is bomb-proof. No one company has all the answers. History is littered with the remains of devastated investors left with nothing once their too-amazing-to fail stock went under. Investing is not a game of faith, it is a game of moderation, so do not let this be you. My personal rule of thumb is that no more than five per cent of your total portfolio should be in any one listed company.

The problem for Mum-and-Dad investors is getting caught up at either end of the cycle. When things are going well and running hot, everybody wants to join in. Again, you can blame your instincts here. Nobody likes to be left out, and in the modern world this is especially the case with ‘easy money’. If you’re not invested in shares, or you’ve been sitting on some extra cash for a few years, you might begin to feel as if you are being left behind by everyone else’s great returns. If someone suddenly pipes up and says, “Oh, I’m getting 11 per cent in Fund X” and you start to feel jealous, please hold fire. How much of that is capital gain versus income? Over how long? It might turn out that over the last six months the fund did just that, but the previous three years were nowhere near as fantastic. The really big mistake you can make when racing with the herd is selling into a crash. Missing out on the upside is one feeling. The sensation of true fear when markets are tanking, and thinking you will be left with nothing, is something else. It might sound exaggerated, but this is how you will feel when markets take a turn for the worse. Selling at these points of fear will damage your long-term investment. It is impossible to buy back in at the ‘right’ time, though many try. The result is usually a hefty loss. If you have a properly diversified portfolio, your best plan is to ride out the cycles, difficult though that may be. Don’t try to time the market and pick the tops and the bottoms. Make a solid plan with some professional help at the start and – very important – stick to it. Being consistent is your best method of navigation through good and bad. SPRING 2017 / JuNO 45

YO U R INV E STIN G Advisers often use this line when selling their services: “I can achieve better returns for you than if your money is just sitting in an index.” The only problem is that most have no proof, over any decent stretch of time. Another, much better line, used by the best in the profession is: “I will be there to hold your hand.” And by this they mean that you will have a relationship. They will save you from the very serious mistakes that can occur, caused by greed and fear (see above). This, for some clients, is well worth paying for.

5. FEES ARE NOT THE DEVIL This is the surprise that no one was expecting, and is contrary to a lot of the mainstream advice saying “Always keep fees low.”

Before you do pay, however, be under no illusion that the adviser is going to make you any more money in the long term than any other adviser.

My point is what you get for the fees. This might seem like a simple thing to say, but there are two very different parts to it. All fees pay for administration and custodial services in a fund or portfolio – this is a given. But this is a very small part of the overall fee.

The good news is that most advisers will happily consult with you about your situation before you commit to a plan or any payments, and this is definitely a meeting worth having. For many clients taking a big first step into the markets, I recommend visiting several different advisers.

A large chunk goes to the branded company you signed up with and the adviser who looks after things for you. What you have to decide is whether their service is worth it. Here’s where it gets interesting.

Sure, there will be fees, but having a professional who really understands your situation can be worth so much more in the long run, in terms of giving you comfort and security around your money.

Men, women & money:

Build the life you want! Financial success is about more than numbers. If changing your spending or saving habits was just about maths and budgets, life would be simple. But it’s not. Because we attach emotions to money. Finding Financial success is 80% psychological and 20% practical. We are Money Mentors that understand the psychology of money as well as the numbers. Our money coaching and behavioural change expertise will help you make the right choices. We offer life-changing money mentor programmes that will help you re-write your money story and set you on the path to financial success. Let Money Mentalist show you how to build a positive financial future for you and your family.

Phone 09 236 0082 Email hello@moneymentalist.com www.moneymentalist.com

; stet

Who’s the clearest of them all? .

;

stet

sm cap

;

‘

stet

‘

stet

Trend alert:

Putting customer care at the forefront with financial documents in plain English

Financial institutions worldwide are committing to plain English. At first, this commitment was based on complying with lawmakers and regulators. More recently, the institutions thriving in a highly competitive and increasingly accountable market are those motivated as much by customer care as compliance. “The providers that are really doing well, whose documents are among the best in the world, are those that are motivated more by ethics than compliance.” Lynda Harris, CEO Write Limited and Founder of the Plain English Awards

Clear, concise, and effective – and beyond New Zealand’s Financial Markets Authority (FMA) requires financial disclosure documents to be ‘clear, concise, and effective’. For some organisations, this standard is just the beginning. More and more organisations are going above and beyond compliance. They go the extra mile by regularly gathering staff insights and customer feedback. They test their documents with focus groups. They work hard to create clearer documents and simpler processes that work for readers and users. And many high-profile disclosure documents and other financial communications now carry the WriteMark Plain English Standard. The WriteMark is the internationally recognised quality mark awarded to documents written to a high standard of plain English.

A challenge with enormous benefits Creating clear, effective, reader-focused financial documents is undeniably a challenge. But when providers shift their thinking from regulation and compliance to ethics and true customer care, that job becomes a whole lot easier.

The benefits are worth it: saving time and money with streamlined processes, fewer complaints and enquiries, and greater customer loyalty. Ask your customers what they need. It’s surprisingly effective.

Enter your financial document in this year’s Plain English Awards The annual Plain English Awards celebrate those doing their bit for clear communication. The number of entries in the Plain English Awards grows each year, with financial documents well represented among the winners and finalists. If your organisation has written a document or website in plain English that makes you and your customers proud, make sure you enter it in this year’s Awards. You’ll find a range of categories for documents big and small, websites, individual communicators, teams, and organisations. Find out more here: www.plainenglishawards.org.nz

YO U R INV E STIN G

Not All Bonds Are Created Equal If you have a KiwiSaver account, you’re probably invested in bonds. Their reputation as a ‘safe’ investment shouldn’t blind investors to the risks, writes Paul Gregory of the FMA.

WORDS BY Paul Gregory FMA

48 JuNO / SPRING 2017

PE R S ONAL FINANC E

NEW ZEALANDERS are investing in bonds, whether they know it or not. Around one in 10 people who respond to Financial Markets Authority surveys say they’re directly invested in bonds – but exposure to bonds across New Zealand investors is far wider than this.

The reason is that bonds play a big part in KiwiSaver and the portfolios of those of us who are among its 2.6 million members. The number of bonds in any KiwiSaver fund varies, depending on the type of fund. But nearly all funds, except for most aggressive funds, will have them. Conservative funds, making up nearly a third of all KiwiSaver investments, have a greater percentage of bonds than shares. Around 900,000 New Zealanders have total investments of $9.2 billion dollars in these funds. It’s also clear that while New Zealanders like bonds, they’re not so fond of risk. It’s not just New Zealanders who think that way. Fund manager Blackrock surveyed small United States investors. Almost half told researchers you couldn’t lose your money in fixed-interest assets or bonds. Around the world, investors generally assume bonds are safe.

How do bonds work? When you buy a bond, you’re lending money to a company or government authority. You’re lending them your capital for a fixed period of time, for an agreed amount of interest. All being well, you get your capital back when the bond matures. People invest in bonds because they generally offer more stable returns for less risk. Many bonds are listed on financial markets, so holders can trade bonds before they mature. The more trades there are, the easier it’s likely to be to sell your bonds. Few buyers mean you could struggle to sell. The key information about any bond is its interest rate and credit rating. • The interest rate is the return you get while holding it. • The credit rating helps you understand how likely it is you will get your money back at maturity, and that interest will be paid on time.

expected to be higher, so people prefer them to previously issued bonds. If you’re holding a bond for the cash flow and are happy, then you can hold on to the bond until maturity. But you’ll be getting a lower return, compared to the holder of a newly issued bond, with a higher interest rate. And if you want to sell your old bond, there will be less demand for it, which will affect its value. Rising interest rates may also have an impact on the value of conservative KiwiSaver funds, at least in the short term. Conservative funds are invested in by people who have a very low tolerance for risk, but investors in these funds should understand the impact of rising rates on bonds. Investors in bonds can take solace, though, that when bonds lose value, riskier assets such as shares have been known to record bigger falls.

New bond types Investors looking for better interest rates need to know there are many reasons why bonds can have a higher interest rate. Often, it’s because they’re higher risk. New types of bonds have appeared in the last few years. A number have been issued in New Zealand. Many have interesting names, such as ‘cocos’ (contingent convertible bonds), ‘hybrid securities’ or ‘bank capital notes’. They’re often issued by well-known banks or companies, but they have special features which may make them unsuitable for many retail investors. The bond issuer may be able to stop or limit the interest they pay. Some bonds can be converted into shares at the issuer’s choice, with the potential for the shares to be worth less – potentially much less – than the sum originally invested. These types of bonds were created after the global financial crisis to reduce the risk of a bank going under. The terms of the bond are designed to protect the stability of the financial system. Instead of taxpayers bailing out a bank, investors holding these notes bail out the bank instead.

Holding bonds Investors should value bonds for the income stream they deliver. When markets are jumpy, investors should ask themselves: are my bonds delivering the return I need, over the period I need it, with no doubts that this will continue?

A lower credit rating and a higher interest rate often, but not always, go together, as they can be a sign of the bond being riskier. Certainly, some bonds are riskier than others.

They should also ask, do I really need to sell just because other bonds look like better earners?

Rising interest rates

Of course, an investor might not be comfortable with what they have. Or they may need – or want – a higher return. If so, investors should be conscious that the promise of better returns can be fragile.

This is particularly relevant now. The United States Federal Reserve is raising interest rates. When the financial markets expect interest rates to rise, the value of bonds can fall. This is because the interest rate on new bonds is

So your best defence is thinking hard, doing your research, getting help or consulting an adviser, and choosing well. SPRING 2017 / JuNO 49

YO U R INV E STIN G

50 JuNO / SPRING 2017

PE R S ONAL FINANC E

Five Easy Ways to Boost Your Income Empty bach? Paying for campervan parking? What you don’t need right now can be rented out as part of the ‘sharing economy’ to put money in your pocket. Amy Hamilton Chadwick finds out how to turn an asset into an investment.

WORDS BY Amy Hamilton-Chadwick Freelance writer and registered FA

SPRING 2017 / JuNO 51

YO U R INV E STIN G

WE KNOW WHAT AN INVESTMENT IS: it’s

something you buy to help you grow your future wealth. An asset isn’t necessarily an investment. Assets like homes, holiday houses, boats, and campervans can improve your lifestyle, but they don’t bring you a return. They can also sit like a brick on your finances, costing time and money to maintain, without bringing in a cent. In some cases, they even lose value. But you can now make almost any major asset bring you a return, thanks to the sharing economy.

Spare room or empty holiday home? Airbnb is revolutionising the rental industry, to the extent that it’s spawned an entire mini-economy of property managers and suppliers. It’s a fantastic way to make the most out of either a spare room or an underused holiday home. New Zealand has more than 20,000 listings on the site, with an average price per night of $126. List a room, a shared space, a bed-and-breakfast, or a whole house. Prices start at $14 a night for a twobedroom house in Oamaru and range up to $5,500 a night for a luxury three-bedroom home at a winery near Russell. It’s not money for jam: you’ll need to pay for cleaning, wear and tear, linen, maintenance, water, and power; most of those would usually be covered by a traditional tenant. And you need to work hard to keep your customers happy, because bad reviews will rapidly ruin your business model. But the returns are compelling. The Nested property return on investment (ROI) index (nested.com) compares long-term rentals with Airbnb rentals. In Auckland, the index calculates it would take 380 months to pay off an average priced three-bedroom property at the average rent, compared to just 108 months if you Airbnb it. Gross income from an Airbnb can be double what you’d usually get for a long-term rental property (see page 53).

Lonely boat? Put your boat to work for you by listing it on GetMyBoat. com. It has more than 65,000 boats available to rent across 171 countries, including everything from selfdrive rentals (including quite large vessels) to luxury charters (up to $16,000 a day), and including kayaks,

52 JuNO / SPRING 2017

paddleboards, and jetskis. Your boat needs to be seaworthy and well maintained to be listed.

Underutilised car? Vehicles are often cited as a great example of an expensive item that isn’t a good investment, because in most cases their value drops every year. But you can put your car to use when you’re not using it by renting it out using MyCarYourRental.co.nz or Yourdrive.co.nz. Prices start from under $10 an hour, or you can rent it out daily or weekly. You’ll need a Certificate of Fitness (COF), which is a warrant of fitness for commercial vehicles, from VTNZ, but as a bonus this site actually vets its renters. The rental period is up to you, so for example you could rent out your car when you’re away on holiday in your campervan.

Parked-up camper? Then, when you’re back home, rent your campervan out until your next trip with Shareacamper.co.nz. This site has a range of vehicles from basic Bongo vans through to top-quality motorhomes, ranging from $50 to $300 a day.

Empty car park? And once your carpark’s empty, you could rent that out, too – the Parkable app onsells empty parks throughout New Zealand by the hour or the day, and www.sharedspace.co.nz lists carparks for rent in the Auckland, Hamilton and Wellington CBDs.

Before you join the sharing economy Renting out your assets has never been easier, but you need to remember your obligations and responsibilities – and manage the risks. You have a duty of care to your customers and you need to check your rental is safe and fit for purpose. It’s vital your asset is thoroughly insured – talk to your insurance company before you rent it out. You need systems to check your renters, rental agreements and documentation. Take photos before you rent out an asset, so you have a paper trail in case of damage. There are costs associated with the repair and maintenance of your asset, as well as accounting, legal advice, and other paperwork. You’ll need to consider your financial structures – do

PE R S ONAL FINANC E

you need a new company to rent this asset? – and your tax obligations (see PwC’s article on page 54).

Double your income with short-term stays

Every situation will be different, but there’s no reason you can’t monetise otherwise unproductive assets. Do your research, run your numbers, and you should have a happy and profitable future in the peer-to-peer economy.

For prospective investors or owners, AirDNA, Airbnb’s analytic site, provides a wealth of data on Airbnb listings. Of more than 6,500 active Airbnb listings in Auckland, half have an occupancy rate of 67 per cent or better, and the top 10 per cent have total occupancy.

Gross income from an Airbnb can be double what you’d usually get for a long-term rental property.

One top performer is a one-bedroom apartment in the CBD, for an average of $134 a night. Similar one-bedroom apartments rent for around $580 a week on TradeMe. Assuming both are occupied 50 weeks of the year, the usual rental income for the year would be $29,000, while the Airbnb income would be $46,900. Occupancy rates are the same in Wellington, with around 1,800 listings. A highly-ranked one-bedroom apartment in Te Aro averages $119 a night, compared to around $560 a week to rent a similar apartment on TradeMe. Rented 50 weeks of the year, the long-term tenant would pay $28,000, while on Airbnb it would make $41,650.

Wellington and Auckland rank highly in sharing economy Kiwi site Shareacamper.co.nz recently analysed 31 international cities to see where the peer-to-peer economy worked best. Both Wellington and Auckland featured in the top five overall.

Rank

City

Remember that it’s not only your income that will be higher: tenant turnover, maintenance costs, and management fees will also be steeper.

Homes

Campers

Cars

Boats

Occupancy rate: 80%

Occupancy rate: 50%

Occupancy rate: 75%

Occupancy rate: 40%

Annual Return

Annual return

Months to recoup cost

Years to recoup cost

Months to recoup cost

Barcelona

9.7%

6.19%

3.55%

7.94%

Wellington

9.33%

3.91%

5.82%

4.01%

Melbourne

8.21%

7.72%

7.61%

19.46%

Sydney

11.96%

4.76%

5.95%

9.62%

Auckland

8.87%

4.01%

4.86%

3.37%

London

4.99%

2.54%

4.73%

4.41%

Source: sharecamper.co.nz SPRING 2017 / JuNO 53

YO U R INV E STIN G

Tax Tips for the Age of

Airbnb

With the shared economy growing, Kiwis renting out their assets may find themselves with increased tax obligations. PwC partner Anand Reddy suggests some things to be aware of.

IN 2011, Time magazine called the ‘sharing economy’ one of the 10 ideas that could change the world. Since then, we’ve seen a growing number of people make substantial siderevenue from renting out their properties through the likes of Airbnb, sharing vehicles and boats with Uber, Zoomy, and GetMyBoat, and even renting out their empty driveways and carparks by the hour, with New Zealand’s Parkable.

Skills are also being shared in this collaborative environment. Kiwi company MyCare, for instance, is connecting people who need help – from assistance with errands to live-in support – with those who can provide it. Two years after Time’s prediction, the global sharing economy had already recorded annual transactions of €10.2 billion (almost NZ$16 billion), statistics from the European Commission show. Two years after that, it had almost tripled to €28.1 billion (NZ$43 billion). And that’s at a time when PwC US’s figures showed only 44 per cent of people had even heard of the sharing economy. You’d be hard pressed today to find a person in New Zealand who hasn’t heard of Uber or Airbnb – to name just two of the biggest players in the sharing economy. In fact, some families and individuals are discovering it can be more valuable to rent out their investment property or spare room for, say, two or

WORDS BY Anand Reddy PwC

54 JuNO / SPRING 2017

three nights a week than have a long-term tenant paying rent. However, it’s important to remember that the tax laws still apply. Inland Revenue has provided some guidance for people monetising their assets in the sharing economy. It says: “If you get money from renting out your house, a room, a caravan or a sleep-out for any time at all – it’s income.” The same goes for money made from trading skills or ride-sharing. Investing safely means making sure you’re on the right side of the law and avoiding the penalties that come with failing to follow the rules. So, let’s look at some of the tax obligations you should be aware of and may encounter, depending on your situation.

1. You may need to register for GST If you rent out your boat, non-residential property or many other assets, you could be obligated to register and account for Goods and Services Tax (GST). Registration is generally required where you have had turnover of $60,000 or more in the last 12 months, or expect to have turnover of $60,000 or more in the next 12 months. If you do register for GST, you may also be able to claim GST back on a certain portion of expenses in relation to these assets. Speaking of which . . .

PE R S ONAL FINANC E

2. You will likely have deductibles

4. Appreciate depreciation

Paying income tax (or other taxes) on the assets you’re sharing also comes with the possibility of deducting a portion of your interest and fixed costs. Car or boat owners who use these assets for mixed business and personal use will likely be able to claim for registration and insurance, at least for the time the vehicles are used for earning income.

Assets that are important to your rental income and likely to depreciate in value – furniture, carpets, and other possessions – can often be claimed against. If the property is not rented out for the whole year, owners will generally be able to claim depreciation only for the time that the asset is used to earn income.

Similar rules apply around expenses incurred in relation to renting out residential property. Generally deductions can only be made to the extent the asset is used to earn income.

5. Be a tidy Kiwi

3. Be prepared for provisional tax Anyone with ‘residual income tax’ to pay of more than $2,500 will have to pay provisional tax (broadly, residual income tax means a person’s remaining tax liability at the end of the tax year, after claiming all allowable deductions and tax credits). Whether your residual income tax will be, or is, more than $2,500 can be difficult to predict and accurately work out. Underpay, and you may be liable to shell out interest to Inland Revenue; overpay and your money will be tied up at Inland Revenue, at very low interest.

Be sure to keep clear records of all income and expenses made and spent as part of your assetmonetising venture. This will make it easier for you and Inland Revenue to identify your tax obligations when you fill in your individual tax return (IR3). Cloud-based accounting software can be a cheap and easy way for businesses to keep track of their business’s performance. People with other tax concerns can contact Inland Revenue or their tax adviser. When it comes to the effect tax can have on your assets and investments, it’s always better to be safe than sorry.

Do you have provisional tax to pay? PwC tax pooling solutions can remove the stress with a full suite of online services for any New Zealand tax payer. pwc.co.nz/taxpooling Matt Rama E: matthew.g.rama@nz.pwc.com T: +64 9 355 8291

© 2017 PricewaterhouseCoopers New Zealand. All rights reserved. PwC refers to the New Zealand member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

YO U R INV E STIN G

What Your House is Really Worth Stories of people selling their homes to shysters for less than their real value send a chill down a homeownerâ&#x20AC;&#x2122;s spine. But how can you find out the true value of your house? Brenda Ward asked the experts.

WORDS BY Brenda Ward JUNO Editor

PE R S ONAL FINANC E

IN LIFE, YOUR WEALTH is measured by your assets and your investments. But when people come to put a price on what could be their biggest asset – their home – emotion can get in the way of facts. That’s why the experts say it’s important to do your research and compare many sources of information.

“They have facts and data to back that up. We use a statistics platform which is an aggregate of data we’ve collected. It’s the most up-to-date data – recorded when the property goes unconditional.”

Lately, many competing sources of property data have sprung up, some charging for their information, and others not. It’s now become a complex task to weigh up different assessments, to arrive at a fair figure. Here are some of the options:

“Just because the next-door neighbours sold their house for X doesn’t mean yours will sell for the same.”

Council Valuations For many decades, New Zealanders used their ‘government valuation’ (GV) as a rough figure to estimate how much their house was worth. Done threeyearly and known now as a CV, council valuation, they were never intended to be used for selling or marketing a home, even though people did use them that way. The assessments compare recent sales in the area with the property being valued and use that figure to calculate every homeowner’s portion of local government rates. For a time, CVs were in the ballpark of the value of Kiwi homes, but the problem was, the older the CV became, the more inaccurate it was. “They’re a blunt instrument,” says Ashley Church, chief executive of the Property Institute of New Zealand. “Council valuations don’t take account of any changes and improvements. Nor do they show if owners have put a bit of love and care into the house. “Just because the next-door neighbours sold their house for X doesn’t mean yours will sell for the same.” Now, in many places, and especially in Auckland’s overheated real-estate market, they’ve become useless for predicting the sale price of your home.

Real-estate agents Most people start the selling process by asking two or three real-estate agents to look through the property, says Church. “The agents will give you an idea of what they believe your home will sell for, relative to other houses they’ve sold in that area.” Bindi Norwell, chief executive of the Real Estate Institute of New Zealand, says local real-estate agents have the best understanding of values, know the area, and can compare your home to actual sales of comparable houses.

– Ashley Church Estate agents get a thorough training before being licensed and then do ongoing training to keep their licences, she says. A good agent has a deep knowledge of your area, knows how to market your property and what it needs to make it attractive to buyers, knows which regulations you need to comply with, and takes health and safety into consideration. She suggests sellers first go online to look at what’s available in the area, in their style and size of house. “Then speak to three agents and get them around to look at your home. Be very clear with what your needs are,” she says.

SPRING 2017 / JuNO 57

YO U R INV E STIN G

There should be good trust and communication between parties, as the agents keep you in the loop, sending emails and information to you. She says people should research their area first, but not have a fixed price in mind. Many people come to realestate agents expecting to get the sum a website has suggested, but find it’s worth more – or less.

Homes.co.nz The high-profile website Homes.co.nz started in 2015, offering free data on 1.6 million homes across New Zealand. It’s based on a UK model, says spokesman Jeremy O’Hanlon. Homes.co.nz buys data from councils showing sales transactions, and examines this along with any recorded information about the site, size, improvements, and even sea views. Number-crunchers run area-specific algorithms, using more than 1000 different models to determine house values. The site claims that nationwide their Gross Median Error is under 8 per cent, which is generally considered as world class. It’s not intended to help you sell your home, however, says O’Hanlon. “A Homes estimate is a starting point. We wouldn’t expect people to use it to determine the market value; it’s a guidance that’s usually used for people to track the estimated value of their house over time.” The key to selling is finding a great real-estate agent, he says. “Make sure you get an agent in your area who is proven.” He suggests you look at estimates on homes.co.nz, then find an agent who’s sold four or five homes in your area. “Turning blindly up to an agent isn’t as effective as having done some research.” Selling without an agent? “Buyer beware – we don’t recommend it,” he says. “It’s your biggest asset. Great agents will pay for themselves.”

Registered valuers “There’s been a proliferation of online ‘valuation’ sites, of variable quality, based on outdated council-assessed valuation data,” says Church. But if you want an accurate estimate, he recommends you get your home valued by a registered valuer. “You know that they went to university and they know the factors involved. They take into account location, improvements, décor, and anything that makes your house different.”

58 JuNO / SPRING 2017

The cost of a valuation varies from region to region and is determined by variables such as who orders the valuation, the complexity of the job, and the urgency of the request. “Regardless, It’s absolutely worth it. Relative to what you’re selling a house for, it’s a small sum of money.”

Valocity Banks have always sourced their own data to work out how much to lend a purchaser. This part of the business is heavily regulated, says Valocity’s general manager, valuations, Kerry Stewart. Valocity is a nationwide property data and valuation platform, which is used by banks and the finance industry to value properties on which they’re loaning money. “It prevents collusion by using randomly selected valuers to do reports,” he says. This prevents, say, property developers from working with those valuers who potentially could provide them with favourable valuations for banks. The same data is used by MyValocity, which supplies the public with information about properties they want to buy or sell. A rating valuation report is free; there’s a bank-approved report available for $44.95; and a sellers’ pack for $49.95. Valocity valuation manager James Wilson says registered valuers should give homeowners a reliable valuation: “A valuer will assess a property’s worth without emotion. It takes that entirely out of play and tells you what that property is worth on the open market.” He suggests sellers first go online to get an automatic valuation model report (AVM), then look at similar properties online and do a drive-by, to draw comparisons. All the sources we approached said the same thing: Do your research and understand the real value of your home before you sign any contract. Spending the time and money to understand the true value of your home will be a worthwhile investment.

DEFINITIONS CO L L U S I O N : A secret or illegal co-operation or conspiracy in order to deceive others.

INVESTING RESPONSIBLY:

Water. There is no substitute. Water is possibly the world’s most overlooked and yet precious resource. It is essential for life and there’s simply no substitute. Water seems plentiful, yet over 97 per cent of the earth’s resource is seawater and a further 2 per cent is locked away in ice caps and glaciers. This means 99 per cent of the world’s water is difficult to utilise. A small fraction of the remaining 1 per cent comprises usable freshwater from sustainable lakes and rivers.

Investing in the water industry Companies in the water industry have opportunities across both developed and emerging markets. In the US and Europe, ageing infrastructure and years of underinvestment mean essential water systems need to be repaired or replaced. In emerging economies like China and India, investment opportunities include entirely new water delivery and treatment infrastructure to cope with growing demand. Companies are responding to the challenge by developing better technology for:

Water scarcity: a global issue The impact is worldwide. In 2015 world leaders ranked water scarcity as the single greatest risk to societies. Here’s the challenge:

• 2 billion people currently lack clean water available at home when needed • One fifth of the world’s aquifers are over-exploited

• purifying drinking water and treating wastewater • desalinating seawater with greater energy efficiency • repairing old and leaky water pipes while they remain underground • reducing water waste when irrigating crops • managing water resource more effectively with smart metering

• Water use grows at twice the rate the world’s population increases • By 2030 almost half the world’s population will be living in areas of high water stress

It is a problem that every country faces, and is particularly acute near the equatorial belt. For example, China’s 1.4 billion people (18 per cent of all humanity) have one-quarter of the global average water reserves per person. China has the same endowment of water as Canada, yet 40 times more people to provide for. This makes clean water a serious challenge, particularly when one in three of their waterways is spoilt by industrial waste and other pollutants.

Pathfinder Asset Management Limited is the issuer of units in the Pathfinder Global Water Fund.

The Global Water Fund Our Global Water Fund has a seven-year record of investing in listed water treatment, distribution, materials and technology companies. It also incorporates environmental, social and governance factors as part of the investment process.

The Fund’s average return is 13.4% a year over the last five years (calculated to 30 June 2017, after fees and before tax). For more information and a Product Disclosure Statement please visit our website www.path.co.nz or call John Berry or Paul Brownsey on 0800 PATHFINDER.

YO U R INV E STIN G

Boomtown Stats Since the last election, property has made spectacular gains. Jeremy O’Hanlon of Homes.co.nz suggests what we might see in the next few months.

THERE’S NO DOUBT we’ve seen some eye-

watering growth in the property market since the 2014 election. Queenstown homeowners have made capital gains equating to $150,000 a year, with Aucklanders the next best, gaining $100,000 a year. Considering how long it takes most first-home buyers to save $100,000, it’s pretty clear that this does nothing good for the wealth divide in New Zealand. Queenstown and Auckland have had aggressive population growth over this time, but the gains aren’t contained to these centres. Whangarei is ranked second for percentage capital gains, with a whopping 61 per cent growth over this period. Compare this to the interest rates being promoted on

60 JuNO / SPRING 2017

banks’ websites currently, and you can see why New Zealand is hooked on property investment. In line with the last property boom, towns that are near beaches have done exceptionally well too. The Coromandel and Far North are both in the top five for percentage gains. It’d pretty easy to see what a bunch of Aucklanders have done with their capital gains, given the growth in bach towns. There was a significant slowdown in transactions leading up to the 2014 election, then a big jump in transactions driving towards Christmas. It will be interesting to see if this happens again, and what impact it has on perceptions of property investment.

Difference in house values since 2014 election

PE R S ONAL FINANC E

AUCKLAND

HAMILTON

38.8% 43.0%

TAURANGA

51.6% WELLINGTON

CHRISTCHURCH

DUNEDIN

34.9% 13.4% 30.8% Source: homes.co.nz Data supplied by homes.co.nz SPRING 2017 / JuNO 61

62 JuNO / SPRING 2017

PE R S ONAL FINANC E

Charitable Giving: How Much Should You Give? Thinking about your charitable giving as you would any other investment gives you freedom to prioritise the issues you care about over random requests for donations, writes Karyn Tattersfield.

WORDS BY Karyn Tattersfield Social Effect

SPRING 2017 / JuNO 63

YO U R INV E STIN G

RACING INTO THE SUPERMARKET to grab that last-minute ingredient for dinner, it’s not unusual to be accosted by a charity worker with a great cause. According to research, only one in 10 of us is happy to stop and chat. For the other nine, getting to the vegetable section can feel akin to running the gauntlet.

system, makes us feel connected to our communities and gives us a heightened sense of wellbeing.

Picking up an extra charity along with your broccoli is unlikely to be in your master plan for managing your approach to charitable giving – but do you even have a plan? Without one – as anyone without a shopping list in their back pocket can also attest – anything can happen.

Kiwis have a reputation for generosity. A 2016 Charities Aid Foundation report ranked New Zealand the second most generous country worldwide, behind the United States.

Why we love to give The benefits associated with giving are well documented. Kind acts lead to increased serotonin levels – not only for the giver, but for the receiver and anyone who happens to witness the act. Generosity is associated with positive effects on the immune

It’s true that money can’t buy you happiness, says Dellwyn Stuart, chief executive of donor services organisation Auckland Foundation – “unless you give it away.”

“We give the equivalent of 0.79 per cent of our GDP to not-for-profit organisations,” Stuart says. “But balancing careful personal money management with generosity and making sure what’s invested goes to the issues you care about most can provide challenges.”

Manage your donations like an investment “Like any investment, the best way to measure the value of your charitable giving is according to what it achieves, rather than how much you invest,” says Stuart. A well-thought-through giving strategy can be the perfect antidote to conflicting feelings about the stream of worthy causes coming at you each day on the street, on social media and via your inbox. “You can’t support everything, so think about what you can and want to support, what kind of impact you’re looking for, and how you can measure that. “The best way to measure impact is by asking ‘what does my money change?’ This can mean directly asking the

“Like any investment, the best way to measure the value of your charitable giving is according to what it achieves, rather than how much you invest.” – Dellwyn Stuart. 64 JuNO / SPRING 2017

PE R S ONAL FINANC E

charity to provide an explanation of the outcomes related to that extra injection of cash, but also balancing our own need to do the ‘due diligence’ on the social impact of the donation with the charity’s need to get on with the job at hand.” Thinking about the ‘proof point’ and what success looks like in line with the cause you care about can be an excellent starting point.

disposing of an asset. You may be downsizing your house. You may have decided you want a complete change in terms of what you want out of life. “It’s these transition points that cause people to consider what’s important to them – to stop and say, ‘what more can I do?’ And we’d like to be able to help them answer that question.” nzcommunityfoundations.org.nz

But philanthropy dollars are also essential to innovation in a healthy community sector. “It’s the job of philanthropy to take risks, to innovate – not to do what people already find acceptable,” says Stuart. “Once a solution is proven by this ‘risk money’, it provides a proof point and opens the way for the government to spend with confidence with its vastly more powerful taxpayer dollar.”

Deciding how much to give Deciding how much to give is a very personal process. It’s important to consider your own life stage, your personality and unique personal circumstances. There will be times you can afford to give and times your resources are needed closer to home. “In the ‘sandwich years’, where 40- and 50-somethings may be juggling young families, demanding careers, mortgages and aging parents, it’s unusual to have a solid personal-giving plan in place,” says Stuart. ‘Collective giving’ and mixing community impact with fun are emerging as popular ways for those short of time and money. They include giving events (like The Funding Network’s events), and ‘giving circles’, like book clubs, where people get together regularly to connect socially with like-minded people with an interest in making an impact. Another idea taking wings in New Zealand is ‘live charity crowdfunding’. The Funding Network is described as a ‘Dragons’ Den for charities’, holding events to raise as much money as quickly as they can. At the other end of the spectrum, there are people ready to take a more solitary, or longer-term view of their giving. They may consider setting up their own trust, creating an endowment or planning a bequest as part of their legacy. Perpetual Guardian, for example, will administer trusts, or offer subtrusts of its own trust, The Foundation. People often rethink their approach to giving around major life events, or as they approach life transitions, says Stuart. “Somebody significant may have passed away. Your kids may have left home and become more independent. Your business may have reached a size and value that takes you by surprise, or you may be

What is a community foundation? Community foundations are not-for-profit donor services groups helping people create social change in their local area by taking care of administration, investment, and governance. They offer local insights into social issues and advice on effective giving. Community foundations are a 100-year-old global movement and the fastest-growing form of philanthropy. There are 15 community foundations in New Zealand and more than 1800 around the world. Being place-based, community foundations focus on their local area and are in a unique position to provide advice on effective giving. They are not-for-profit organisations, built around a cost-recovery model to maximise the impact of every dollar given. Community foundations are the giving option of choice for both big donors like Facebook’s Mark Zuckerberg and the humble guy next door. They are popular due to their simplicity and the fact that donors decide where to spend the dollars. Donors can be as involved as they like. They are highly flexible, and operate according to the donors’ wishes. The foundation takes care of compliance and administrative matters, investment, and governance. Donors can be as involved as they want to be, with many delighting in focusing on the giving and the benefits their gift will bring.

SPRING 2017 / JuNO 65

YO U R INV E STIN G

Ways to practise thoughtful giving • Giving circles appeal to people who want to make a bigger impact than they could alone. They can pool resources with friends or meet new people with similar goals. • Giving events connect donors and donees. They’re enjoyable for donors who don’t want a regular commitment, who may be time-poor but enjoy direct relationships with charities. • Planning a bequest is a great way for people who have accrued wealth during their lifetimes to make sure a percentage of their residual estate goes to an organisation they care about, in one lump sum. • Endowment funds are popular with people with a long-term view of supporting a cause. They have usually taken care of their own affairs – for example, their children have left home – but are still earning, so can make regular contributions. Endowment funds are a particularly useful resource for the community sector, as they offer a regular stream of income without having to manage the fund. They appeal to people with a certain amount of discipline, who want to leave a legacy but who don’t need the immediate gratification that comes with making an impact. • Contributing to an existing fund through a community foundation or other type of foundation will appeal to people who may be time-poor but value due diligence and the ability to provide an agile response to issues that matter in their community. • Starting a new fund, trust, or charity often appeals to people who have had a significant event occur in their lives. Often the sudden death of a loved one can be the impetus for an ‘in memorium’ fund, for example. 66 JuNO / SPRING 2017

The Fabulous Ladies’ Giving Circle “Academics? Fabulous ladies?” Professor Deborah Levy laughs. “You don’t usually think of academics as fabulous – it’s meant to be whimsical.” ‘The Fab Ladies’, was established by Professor Levy and her colleagues at the University of Auckland Business School as a way to connect. “There are a lot of working women who would love to join book clubs or knitting circles, but we just don’t have the time to read all the books because we’ve got other things to do.” With a giving circle, along with a reason to connect came a fun, low-administration way to make an impact in an area they all cared about. “We wanted a big objective – we wanted to reduce child poverty in New Zealand through education.” Consequently, the group supports young parents by paying for childcare, allowing them to finish their education and, as a secondary benefit, providing education to their preschoolers. The group makes decisions by consensus. They agreed they’d each donate $20 per week, and that they would grow the fund’s capital. The fund’s income plus a portion of the capital is given away each year, enabling the fund to exist in perpetuity. The Auckland Foundation handles documentation, money and donations. “My real fear was touching money – I didn’t need that in my life, I didn’t want that responsibility,” says Professor Levy. “All you have to do is try to agree on where the money goes.”

Lee and Penny Stevens: Career Philanthropists A trust established in memory of his mother Rua has shaped the lives of Lee Stevens and his wife Penny. It has also provided the lifeblood of many young, dynamic community organisations in New Zealand and beyond.

Lee and Penny’s advice for small philanthropists:

Rua died of leukaemia at a young age nearly five decades ago. Lee’s father Clarrie died 25 years to the day after Rua, on 12 July, 1995. It was then that his name was added to the trust.

• Take risks with your philanthropic dollar – where else will small charities get money? Don’t be afraid to make mistakes; something else will pay off.

The Rua and Clarrie Stevens Memorial Trust’s capital value has now reached over NZ$1.5 million, and over its lifetime it has distributed more than NZ$1.4 million to around 200 organisations.

• Support organisations that work in areas to which you feel an emotional connection.

Lee took over the trust from his father, and it became his full-time job. Penny joined him administering the trust and it became a lifestyle of giving for the couple. As part of its succession planning, the trust was formally signed over to the Auckland Foundation, becoming a ‘sub-fund’, on 12 July, 2015 – 45 years to the day after Rua’s passing and 20 years to the day after Clarrie’s. Lee Stevens became a member of the New Zealand Order of Merit in the 2016 New Year Honours. He says it’s only now he’s handed over the trust to the Auckland Foundation to administer that it is beginning to dawn on him how much this journey has enveloped his life. “As the philanthropic journey has progressed, I’ve had to learn and upskill myself, without the benefits in those very early days of such organisations as Philanthropy New Zealand, and latterly community foundations such as the Auckland Foundation.”

• Support local organisations, so you can get in your car and have a look at what they’re doing. • Help start-ups become sustainable: paying salaries is important. • Support small organisations, where you can really see the benefits. • Don’t get bogged down in the detail: use organisations like the Auckland Foundation to manage and administer your fund while you enjoy the relationships and outcomes. • Get a team around you who you trust, and who support what you believe in. • Get to know your beneficiaries and take an interest. “We always say to them, ‘We want to hear about things that aren’t working – we don’t just want the good stuff’,” says Lee.

SPRING 2017 / JuNO 67

An Easy Way to Give Let your financial adviser take care of your investments for charity using a method of giving thatâ&#x20AC;&#x2122;s new to New Zealand, writes Julia Capon.

WORDS BY Julia Capon The Gift Trust

68 JuNO / SPRING 2017

PE R S ONAL FINANC E

TRADITIONALLY, a budding philanthropist starting their giving journey would either give directly to a charity or set up a foundation. Today, there’s a new way to give.

Many donors are trying an alternative giving method: Donor Advised Funds (DAF), a ‘giving account’ held by a not-for-profit organisation. DAFs are like a savings account for your giving dollars – the equivalent of a ‘personal foundation’, but without the administrative hassle. A donor places a non-refundable donation into their giving account and receives an immediate tax deduction. The donor can then choose which charities they’d like to make grants to, and when. The biggest difference to traditional foundations is that these funds can be managed by your existing financial adviser, alongside your personal investment portfolio. Your charitable donations can be invested for growth over time, while getting tax-free growth.

International trend They’re new to New Zealand, but DAFs are the fastestgrowing form of philanthropy in the United States. And now they’re growing in popularity around the world. In 2016, US$78.64 billion was held in DAF accounts in the US alone, with more than 269,180 individual donors. And this money isn’t just sitting around in investments or endowments – more than US$14 billion was handed out to charities during the year. Now a new partnership between The Gift Trust and specialist financial services firm Consilium offers Kiwi givers the first New Zealand DAF opportunity. Ben Brinkerhoff, head of partner firm services at Consilium, moved to New Zealand in 2011, after working for a successful US financial firm. He was surprised to find hardly anyone was offering donoradvised giving in New Zealand, he says.

New partnership The Gift Trust, a national charitable trust operating donor-advised accounts in New Zealand since 2009, has formed its first partnership with Consilium, enabling a growing network of financial advisers to offer this DAF product to Kiwi philanthropists. Financial advisers can support their client’s giving, and donors get the advantage of having their gift funds invested by their own trusted adviser. Cheryl Spain, manager of The Gift Trust, says the new collaboration allows financial advisers to offer an extra service to their charitably-minded clients. “They can support their clients to also reach their charitable giving goals. Through the Consilium

“It lets me get straight to the fun part of giving to the causes I care about, without the hassle.” – Anake Goodall platform, these clients will be able to track their personal investments, alongside their gift account investments.” It’s not just about writing a cheque to the donor’s favourite charity once a year. The Gift Trust also helps donors by checking out each charity to make sure they’re maintaining their charitable status.

Quick-start account A gift account can be up and running almost instantly, with a first contribution starting from $5,000, and no set-up fees. Sue Barker, lawyer and charity specialist, says: “The administration and ongoing compliance involved in setting up a personal foundation can be onerous and risky. “A gift account allows The Gift Trust to look after those requirements, so the donor can focus on what they really want to do with their gifts.” Donor Anake Goodall says he’s excited by this investment opportunity. “I’m keen to invest in socially responsible funds, so it will be great to work with my financial adviser to align both my personal investment portfolio and my charitable gift funds with my investment values. “The Gift Trust has already made my giving easier. It lets me get straight to the fun part of giving to the causes I care about, without the hassle.”

What is a DAF? • Adviser-managed: Gift funds can be invested for tax-free growth with an approved investment adviser. • Flexible and personal service for donors. • Consolidates all your giving in one place – just one tax receipt to claim per year. • Simple, fast, low-cost set-up. A $5,000 first donation. Adviser-managed accounts start from $20,000. • Donations can be anonymous or named. • Cheaper alternative to setting up your own foundation. The Gift Trust – thegifttrust.org.nz SPRING 2017 / JuNO 69

THOUGHT-LEADER

The Missing Millions A new wave of second-generation cloud accounting will utilise artificial intelligence and machine learning, says Rod Drury.

FOR DECADES, big business has been benefiting from global technology investment. The big players like IBM, Microsoft, Oracle and Salesforce.com have focused on building enterprise-scale business technology, finance and business solutions.

cloud infrastructure, high-powered computing, large data-sets, and smart automation.

By contrast, small business has not seen the same investment historically. Surprisingly, the major players in the small business accounting software market have only between 5 and 10 million small businesses using their desktop accounting packages. This leaves behind millions who still havenâ&#x20AC;&#x2122;t used any accounting software at all.

Not having to install software on a small-business desktop has fundamentally changed the distribution costs of providing technology to small business. They now have access to a plethora of new web-based services, in many cases giving them better access to technology than large enterprises have.

In the past 15 years, the cloud has made it possible to take big-business technology and make it relevant for small businesses and their advisers.

The World Bank says the value of small businesses across most economies is immense: they make up around half of all gross value added (GVA), one-third of the labour force, and 97 per cent of all business entities.

In 10 years, cloud accounting solutions have matured, with some providing a more sophisticated set of features to desktop software, but with the benefits of anytime, anywhere access and connected mobile apps. This has driven major productivity gains for small businesses, accountants, and bookkeepers.

Technology shift

In early-adopter markets like New Zealand, more than a third of all businesses now run cloud accounting.

The global technology industry has witnessed its first inflection point away from â&#x20AC;&#x2DC;big business techâ&#x20AC;&#x2122;, with major cloud platforms digitising consumer technology. For example, there is now Uber for transport, Airbnb for accommodation, Facebook for personal social networking, and Amazon for retail and more recently content. This has been made possible by cloud-based and mobile consumption of these services. But also, the companies themselves have invested heavily in public 70 JuNO / SPRING 2017

What is exciting is that we are now at the next inflection point, which will finally open up adoption of cloud solutions for the majority of small businesses.

AI-driven accounting The second inflection point is along the lines of the first, focused on consumer technology. The public cloud, high-powered computing, and smart automation across large datasets will now be applied directly to small businesses.

X E RO BU S INE S S

This will enable the next big step in productivity and make it easier for small businesses to manage their business and do their books and taxes, and for accountants to deliver high-value advice.

The second generation of cloud accounting will drive productivity and success for small businesses, and they won’t necessarily need to even know they are doing accounting. Advantages are:

Small business accounting will be one of the early industries to benefit from ‘machine learning’ and artificial intelligence (AI) because there are vast amounts of high-value data to train machine-learning engines.

• Single code base – build and deploy

A simple structure

• Public cloud infrastructure – ship code once and globally

For example, Xero recorded $1.4 trillion of incoming and outgoing transactions in the past 12 months. Early deployments of AI and machine-learning features are delivering results already. To provide these services to the small-business segment, just as the big consumer platforms did, business software must cross the chasm and get onto a public cloud platform to be able to deliver innovation and automation with global scale. That means a single code base, artificial intelligence and machine learning, and ‘server-less’ architectures that increase the speed of deploying automated experiences to small businesses at scale. These technologies enable several new models: • A connected global platform to assist small business owners to be able to operate globally. • Dramatic simplification of accounting for small business. • Code-free accounting, where small businesses no longer have to worry how they classify transactions. This is the next major innovation that will unlock the total addressable market. The next generation AI-enabled platforms will do that better than most business owners, removing the major complexity that limited small businesses adopting software.

Addressing the white space Small businesses don’t necessarily need to know accounting – that’s not their passion. Their passion is their customers, products and services. I believe converting the ‘white space’ of small businesses not currently using any accounting software will occur through providing access to solutions that allow them to focus on their passions – but still help them with their business management and accounting needs, and connect them to their advisers. Providing those solutions beautifully, via a single code base on a truly global platform, leveraging automation and AI, is the only way to harness and benefit from businesses and their interactions with customers, banks, advisers, and each other.

• AI and machine learning – smart automation • Billions of transactions and connections – rich data to learn from

• ‘Server-less’ architecture – infinite scale. The move from desktop software to first-generation cloud has been slow. While cloud accounting is arguably better and easier to use than traditional methods, small businesses still have to do accounting. The key to unlocking the opportunity for millions of small businesses will be in the second-generation cloud, where automation and AI will create new experiences like code-free accounting, and will become the de facto standard for small business technology.

“The second generation of cloud accounting will drive productivity and success for small businesses, and they won’t necessarily need to even know they are doing accounting.” Cloud will accelerate With three million small businesses now on cloud, we can be confident cloud accounting is the future. But there is a new generation of small-business cloud platforms that are AI-ready and delivering their first AI features. The industry is poised for massive AI-led innovations that will simplify accounting activities for the smallbusiness owner and encourage accountants to scale their practices. Those missing millions are coming. Be ready. In the words of Jeff Bezos, founder of Amazon.com, “artificial intelligence is not just in the first inning of a long baseball game, but at the stage where the very first batter comes up . . .” There’s never been a more exciting time for business software. SPRING 2017 / JuNO 71

X E RO BU S INE S S

Smell the Coffee A love of working with people has driven Al Keating in his role at Coffee Supreme, a coffee-roasting company that’s spread from its New Zealand roots to Australia.

AL KEATING’S first memory of drinking coffee was when he was eight.

“On Sunday mornings, Dad would make coffee in a saucepan and let us drink the leftovers. I thought, ‘Yeah, this is a pretty special drink, I could get into this’.” Then, when he was 16 years old, he got a job in a café called Captain Delicious. It reinforced his passion for coffee and made him realise he wanted to make it his career. “I think coffee is the great leveller. It doesn’t matter whether you’re Donald Trump or a homeless person – you love coffee and you have that in common.” Now he’s the creative director of Coffee Supreme New Zealand, and describes hospitality as “generosity paying attention”. Coffee is his business, but he says it’s people who drive him. “I love people. I think more than anything I love working with people. People are the hardest thing and the most rewarding thing to work with. “I love spotting somebody young [applying for a job] and saying, ‘Hey, I should give him a shot, or I should give her a shot’ . . . and seeing somebody become better at what they’re doing while working inside the organisation.” Like many small businesses, when Coffee Supreme first set up its roastery in Auckland, it started in a pretty basic way – in its case, in a warehouse. “We realised there was no greater way to influence people than through our own generosity and hospitality. For us, that meant having people sit at our own table. 72 JuNO / SPRING 2017

“So, we built a café called Good One for just that – to sit people down at our place, to offer them a cup of coffee, and to demonstrate true hospitality.” Closed now, it was a quirky spot, tucked away down a back street with a roller door for an entrance. But quirkiness often pays off. It soon lived up to its name, becoming “one of the city’s darlings – quite a pioneering joint”. Keating is a passionate Kiwi. “New Zealand is an amazing country,” he says. “Besides Frodo and Lorde, I think it’s pretty rare to find a country where the beach is only a few minutes’ drive away, it’s OK to have bare feet in the supermarket, and you can eat fish and chips on the bonnet of your car. “I think there’s something beautiful about New Zealand; it seems very simple.” Keating likes to keep the business simple, too, and says he finds traditional accounting a challenge. He switched to the Xero cloud-based accounting solution for its ease of access. “When I need the information, I know I have access to it. As far as looking at spreadsheets and pages and pages of numbers . . . I find that like chewing dry flannel – it’s pretty tough going.” He uses Xero to integrate with Posboss, a point-of-sale software developed specifically for the hospitality industry. “Posboss is great for hospitality businesses, because it was designed by a hospitality business owner. It works on iPad, is easy to use, provides us with valuable backend information, breaks down the cost of sales, works with multiple printers . . . it’s got everything we need.” – Lucy Godwin

WIN a fabulous weekend at Stamford Plaza Auckland We love to hear from you so we can offer you even better content in JUNO. It takes just five minutes to let us know what you’d like to see in the magazine. > Go to www.junoinvesting.co.nz/readersurvey One lucky survey participant will win a two-night experience at Stamford Plaza Auckland. This includes: • • • • • •

Two nights’ accommodation in an Executive Room Dinner at Knights on Albert Restaurant up to the value of $200 Buffet breakfast for two on both mornings Valet parking for one car for two nights Free unlimited Wi-Fi Access to all hotel facilities, including indoor heated pool, whirlpool spa, sauna and techno gym

Terms and Conditions: Competition closing date: October 31, 2017. Prize package is valid for stays until April 1, 2018. Prize is for two nights’ accommodation in an Executive Room for up to two guests only. Additional charges apply for additional persons in the room. Subject to availability at time of booking. Food and beverage credit can only be used in Knights On Albert Restaurant; cannot be used for room service, minibar or other charges. Breakfast buffet only available at Knights On Albert Restaurant. Prize package cannot be redeemed or exchanged for cash and any unused portion is forfeit on departure. Offer cannot be combined with other promotions or discounts. Close-outs apply. No correspondence will be entered into.

YO YOU URR INV INVE ESTIN STING G

G A M E C HA N G E R SE R I E S W I T H JA K E M I L L A R

FIVE MINUTES WITH

Sir Eion Edgar Dunedin-born businessman and noted philanthropist Sir Eion Edgar is the chairman of financial services company Forsyth Barr. He shares his views on trust, success and what to do when investments go wrong.

Sir Eion Edgar is a businessman with a diverse range of interests, who has been praised for his lifetime of giving.

Winter Games NZ. He is patron of Diabetes NZ and a life trustee of the Halberg Trust.

He was named NBR New Zealander of the Year in 2004, and Ryman Healthcare Senior New Zealander of the Year in 2010 in recognition of his achievements and generosity.

He’s been on the boards of the Reserve Bank, the Accident Compensation Commission, and Vero.

He’s a former chancellor of the University of Otago, chairman of the New Zealand Stock Exchange, and president of the New Zealand Olympic Committee. He also chairs the Edgar Olympic Foundation, NZ Dementia Prevention Trust, Queenstown Resort College, and the

74 JuNO / SPRING 2017

Sir Eion’s career at Forsyth Barr started in 1972, and he has been involved with the business ever since, much of the time as chairman. Forsyth Barr now manages more than $5 billion of clients’ money.

For the full interview visit unfiltered.co.nz

FIVE MINU T E S W IT H

At Forsyth Barr, how did you build that trust and loyalty with the people who are trusting you to manage their money? When I joined the partnership on the first of April, 1973, I took the view that if you do well for your clients, you will do well. And that’s the philosophy we’ve always worked on and it’s worked very well, because if they do well, they’ll keep doing business with you, and therefore you do well. You might recall there was the Securitibank collapse in 1976. One of our partners, the late Keith Skinner, was a director of Securitibank and . . . we felt that because of his involvement we weren’t as well informed about Securitibank as others. So, we made the decision when it collapsed that we would personally pay out all of the clients of Forsyth Barr who had investments with Securitibank. It was quite a cost to us. But the integrity of paying those people probably did more to grow the business than anything. Another thing was that during the big hype in the late 80s [before the share market crash], we actually stopped taking new clients. We said: “Look, we’re struggling to keep up with our existing clients, why take on more, because we’re just going to put ourselves in a situation where we can’t service existing clients.” So, we were quite unpopular, I have to say, among the industry and people who wanted to become clients, but we said, “Well, look, we’ve got good clients now, we’re trying to look after them.”

From your perspective, what’s the most important factor in the success of a business? Getting the governance right. The governance’s big job is to appoint an inspirational chief executive . . . and then make sure they perform. And if they don’t, replace them. At the end of the day, great companies come from great people.

If you were going to summarise a few bits of advice for people wanting to get into investment, what would you say? No shortcuts! Do your homework. Put in the time or ask your trusted adviser, who can give you good advice. Study it, read about it. Is the industry right? If it’s a growth industry, is it going to get bigger? Secondly, once you’ve decided on the industry, who are the good companies and who’s got the good management; who’s showing innovation?

“Pull the pin quick on the mistakes. If you make a mistake and see that the company’s not going the right way, cut the painter.” It’s really just gradually going through those steps. And of course, the thoroughness of it depends on the relevant size of the investment. If you’re going to put 5 per cent of your wealth into something, you obviously put in an enormous amount of effort into it, whereas if it’s half of 1 per cent you might say: “Well, that sounds like a good idea. The adviser has given me good advice in the past, so I’ll do it.” I think you’ve got to put into perspective the scale of what you’re investing in.

What was one of the best bits of advice you were ever given? Well, I think there are three things that I would say. Firstly, there is no question: the harder you work, the luckier you get. It sounds glib, but it’s right, and it really manifests itself: if you’re going to look at any investment, you need to do your homework. You know you can look at the glossies and other things, but you need to dig in, ask questions. When I look at the mistakes I’ve made – and there’s been a lot of them – most of the mistakes were because I didn’t do enough homework. I trusted the people, thought it sounded a great idea: “Yes, look, I’m busy – let’s get on with it.” Secondly, no one is perfect in their investments. You’ll make mistakes. Lastly, pull the pin quick on the mistakes. I’ve tended to say, “Oh well, I’ve got so much invested I’d better stick in for a bit longer and it’ll come right.” If you make a mistake, and see that the company’s not going the right way, cut the painter.

SPRING 2017 / JuNO 75

Be in to win a Triumph & Disaster ‘stash box’ – the one-stop shop of shaving and skincare.

M AGA ZINE

and invite you to attend the

Men’s Wealth and Wellbeing Seminar

MIKE TAYLOR

DR TOM MULHOLLAND

DION NASH

Share market investment

Men’s health and wellbeing

Business start-up

Mike is the Founder, CEO and CIO of investment company Pie Funds. He is the joint portfolio manager for Pie Growth, Pie Global, and Pie Growth UK & Europe Funds. He was also an Entrepreneur of the Year finalist 2014.

Dr Tom Mulholland is an emergency department doctor who has written two bestsellers on healthy thinking. He is a wellbeing presenter and works with Men’s Health Trust. He has launched a wellbeing app called KYND (Know Your Numbers Dashboard).

Former Black Cap, Dion moved from international cricket stardom into the world of business via Kiwi vodka company 42Below. In April 2011 he launched his own men’s skincare company, Triumph & Disaster.

Be in to win a Cambridge pure wool suit from the new Life For Men S17 collection, valued at $795.

A portion of your ticket price will go to our chosen charity, Banqer. Banqer is an interactive financial learning tool used in classrooms.

And some amazing spot prizes on the night from Continental Cars.

D AT E

THURSDAY 5 OCTOBER, 2017 Bring your phone and take part in our interactive health session with Dr Tom Mulholland and his KYND app.

TIME

DOORS OPEN 6PM EVENT RUNS 6.30PM â&#x20AC;&#x201C; 8.30PM VENUE

CONTINENTAL CARS BMW SHOWROOM 445 LAKE ROAD, TAKAPUNA, AUCKLAND INVESTMENT

$35 PER TICKET Ticket includes a light meal, a drink and a goodie bag.

TICKETS ARE LIMITED

www.junomensevent.eventbrite.co.nz

SUPPORTED BY

YO U R LIFE STY L E

78 JuNO / SPRING 2017

INT E R E S T

Horses for Courses The racing industry is fast-paced, volatile and exciting. But can horses also be a good investment? Annie Cooper talk to owners and investors about how to win.

WORDS BY Annie Cooper SPRING 2017 / JuNO 79

YO U R LIFE STY L E

OWNING A RACEHORSE is a dream come true for some and an investment for others. But before you get out of the starting gate, you need to look closely at some of the basic questions surrounding buying a racehorse.

Around 13,000 people are involved in racing thoroughbreds in New Zealand, although many have only small shares in a single horse. Despite the more than 2,500 races on the racing calendar throughout New Zealand each year, only a few owners will ever get a significant payout. For some it doesn’t matter: it’s the fun of the game. “I regard my investment as a hobby, and it’s difficult to put a figure on the enjoyment and rewards that can come from it, even though your horse may not become a champion,” says racehorse owner Paul Alexandre.

But if you want to make money out of the sport, there are some ways of improving your chances.

Buying a racehorse Your budget to buy a horse might be as little as NZ$1,000, or as high as NZ$1 million. But even if you drop seven figures on a thoroughbred with a fancy bloodline, it’s still not guaranteed to win races. There have been spectacular failures. In the United States, an Irish agent called Demi O’Byrne paid a world-record US$16 million for two-year-old The Green Monkey in 2006. The horse never won a race, and just two years after the purchase it was retired and sent to stud. Alexandre doesn’t have budget but has enjoyed being involved in racing for more than 35 years.

Table 1.

HORSE

SALE DETAILS

PERFORMANCE & CAREER EARNINGS

Aerovelocity (NZ) (Pins – Exodus)

2010 NZB Yearling Sales, NZ$120,000

12 wins, including multiple Group 1 wins in Hong Kong, Japan and Singapore. Two-time Hong Kong Jockey Club Champion Sprinter. Career Earnings NZ$7.8m. Owned by Daniel Yeung Ngai.

Gingernuts (NZ) (Iffraaj – Double Elle)

2015 NZB Ready to Run Sale of 2YO’s, NZ$42,500

Two-time Group 1 winner, five career wins to date. Career earnings $1.1m to-date. Owned by a large syndicate, raced by Te Akau Racing. The syndicate recently turned down a NZ$3m offer for the horse.

Lucia Valentina (NZ) (Savabeel – Staryn Glenn)

2012 NZB Yearling Sales, NZ$60,000

Seven wins, four at Group 1 level in Australia including the A$4.1m Queen Elizabeth Stakes. Career earnings NZ$4.7m. Owned by Lib Petagna.

Melody Belle (NZ) (Commands – Meleka Belle)

2016 NZB Yearling Sales, NZ$57,500

Four wins from seven starts, including the NZ$1m Karaka Million 2YO in 2017 – just a year after being purchased. Career earnings NZ$878,615. Also raced by Te Akau Racing. Owned by the Fortuna Melody Belle Syndicate.

Prince of Penzance (NZ) (Pentire – Royal Successor)

2011 NZB Yearling Sales, NZ$50,000

Seven wins, including the A$6,200,000 Group 1 Melbourne Cup in 2015. Career earnings NZ$4.7m. Owned by A McGregor, A Broadfoot, Galadi Holdings, Wilawi Go Racing Syndicate, Dalton Racing, Men in Hats Syndicate and the Winning Five Syndicate.

80 JuNO / SPRING 2017

Karaka is the leading source of thoroughbred investment and we invite you to experience the unique hospitality, service and world-beating bloodstock at our upcoming Sales: READY TO RUN SALE OF TWO-YEAR-OLDS BREEZE-UPS - 16 & 17 OCTOBER 2017 AT TE RAPA RACECOURSE SALE - 22 & 23 NOVEMBER 2017 AT KARAKA NATIONAL YEARLING SALES SERIES 28 JANUARY - 4 FEBRUARY 2018 AT KARAKA for more information visit www.nzb.co.nz

THIS SEASON MORE THAN 1760 RACEHORSES SOURCED AT NEW ZEALAND BLOODSTOCK SALES HAVE WON IN EXCESS $76M IN PRIZEMONEY, BRINGING THEIR CAREER EARNINGS TO OVER $402M. SPRING 2017 / JuNO 81

YO U R LIFE STY L E “I was advised that any money invested should be money that you could afford to lose,” he says wryly. Despite the odds being against it, there have been some huge earners among Kiwi horses. See Table 1.

Melbourne Cup thrill Auckland sales manager Rex Pearce comes from a racing family and says the excitement of watching your horse race for big prizemoney can’t be beaten. He should know. It was an unforgettable moment when his father’s horse Mr Brooker came third in the Melbourne Cup in 1990. “We bought our horse for NZ$3,000, but it became good enough to race in the Melbourne Cup! The horse that won was bought for AU$1 million. “The winner got AU$2 million. The stake was AU$250,000 for third. But honestly, in the end, the difference between the two horses was just a length!” Pearce’s father, a small-time horse breeder, generously shared his AU$250,000 prizemoney among the family, and Pearce used his share to buy his first home. It’s not just the prizemoney that appeals, he says. He has since part-owned about six horses and currently has shares in one about to return to racing. “When your horse is racing, the adrenaline is incredible,” Pearce says. “It’s amazing, especially when the stake money is high.” When his horse wins, Pearce gets a share of that race’s stake money, minus a percentage for the trainer, the jockey, a riding fee, and a nomination fee. “In its career, Mr Brooker won NZ$770,000, but Dad worked out that we spent NZ$330,000 on it, so that was NZ$440,000 profit. “But the odds are not good. If you own a horse, you should go in expecting to lose, because most often you do. Only a few people make money out of it, but the gains can be significant.”

Ways to own a horse There are several ways of owning a racehorse, says New Zealand Thoroughbred Racing. You can own it individually, or in a partnership or group ownership arrangement. Other options are authorised syndicates; company ownership, where shareholders in the company are the owners of the asset (in this case, the horse); and leasing. Some prefer to lease, rather than buy a horse. The lessee is responsible for the costs of the care and racing of the horse – and collects the rewards from racing. Leases must be formally registered with New Zealand Thoroughbred Racing. You can buy a racehorse by public auction 82 JuNO / SPRING 2017

through New Zealand Bloodstock at the Karaka sales centre near Auckland. The site gavelhouse.com is a new online auction-based website which is a 100 per cent New Zealand-owned subsidiary of New Zealand Bloodstock. Otherwise, you could contact a horse syndicator or stud about buying a horse, or buy privately. A horse’s bloodline is important, and winners are usually bred from well-performed or well-bred horses. Under Stud Book regulations, artificial insemination is prohibited. Famous stallions Sir Tristram and Zabeel, both ‘stood’ (available as a sire at stud for a fee) at Sir Patrick Hogan’s Cambridge Stud, and current Group 1 champion sires Savabeel and Pins stand at Waikato Stud. You could buy a weanling (six-month-old), a yearling (oneyear-old), or a ready-to-run two-year-old. At two to three years of age, a young horse will have its first races. After a successful career, top horses can become broodmares or sires – and are put to stud. Pearce says many of his friends invest only in mares, never racing the horses, but using them solely to produce foals to sell. The service fees for breeding can cost NZ$100,000 plus, but a top foal could sell for more than NZ$500,000 at the yearling sales – and costs for horses used for breeding in a ‘business’ entity may be tax-deductible.

The costs are ongoing Before you buy your horse, consider the ongoing costs. These include breaking in a young horse, and a daily rate for a trainer of NZ$50-NZ$80 a day. There are also trial, track, and race fees. The owner must also pay for medical bills, shoeing, and transport costs. New Zealand Bloodstock says to race a horse with 100 per cent ownership, you should allow between NZ$25,000 and NZ$40,000 a year in ongoing costs. Costs are less if the horse is ‘spelling’ – the months each year when it’s not racing. Within a racing syndicate, Te Akau Racing’s principal David Ellis says a 10 per cent share could be a payment of around NZ$5,000 to NZ$10,000 up front and then about NZ$75 a week, or NZ$3,500 a year. Managing director of New Zealand Bloodstock, Andrew Seabrook, says: “Investing in racehorses may not be the most risk-free investment one will ever make, but if you get it right the returns are potentially huge.” Ellis says: “It’s an exciting industry. People can’t guarantee financial success but we can guarantee fun, excitement, and satisfaction.” New Zealand Bloodstock: www.nzb.co.nz Te Akau Racing: www.teakauracing.com Waikato Stud: www.waikatostud.com New Zealand Thorougbred Racing: www.nzracing.co.nz

JOIN THE CHAMPION TE AKAU TEAM SHARES AVAILABLE NOW IN EXCITING YOUNG HORSES

Te Akau has an outstanding record of over 30 years of success. We have purchased/trained the winners of 29 Champion Awards and it’s fun, easy and affordable to be part of our Group 1 winning team. SINCE JANUARY TE AKAU HAS WON THE: Group 1 Rosehill Guineas (Sydney) $1 million Karaka Million $1 million Group 1 NZ Derby Group 1 Levin Classic Group 1 Manawatu Sires’ Produce Stakes Group 2 Avondale Guineas

All with horses selected and purchased by Te Akau’s David Ellis. Trained by last season’s Champion Trainers, Te Akau’s Stephen Autridge and Jamie Richards and with Champion Jockey Opie Bosson Te Akau’s stable rider, it’s a great time to be involved with Te Akau! We have won more prizemoney this season in New Zealand for our owners than any other stable. Te Akau has won over 200 races in the past 12 months, with stakes of over $6 million across our two stables.

Group 2 Matamata Breeders’ Stakes Group 2 BRC Sires’ Produce Stakes (Brisbane) Group 3 Rough Habit Plate (Brisbane) Group 3 Darley Plate

WE CAN’T WAIT TO HEAR FROM YOU – Call Karyn Fenton-Ellis MNZM* on 07 825 4701 or email karyn@teakauracing.com TE AKAU – WHERE OWNERS COME FIRST www.teakauracing.com

Te Ak au R ACING

Check out the shares that are available NOW at www.teakauracing.com TAS0084

YO U R LIFE STY L E

How to stress less Stress is the health epidemic of the 21st century, says the World Health Organization. Sarah Laurie found our biology causes it – but can also solve it.

WORDS BY Sarah Laurie

WHEN I FIRST BEGAN researching stress and its devastating effects, I was doing it on behalf of lawyers. The levels of stress, depression, and suicide in law are devastating.

However, very quickly, my work led me to other areas hit equally hard – farming, construction, health, and finance. I started to see that stress doesn’t discriminate. But why is this happening in the 21st century, when we live in a time when technology is supposed to be making our lives better?

The stress response The daily lives of lawyers, farmers, and interns are vastly different, yet they’re all experiencing devastating stress. What’s the common factor? It’s our brain – deploying its stress response. So the way to manage our stress better is not to try to fix every stressful thing that happens in our lives – it’s to fix our stress response to those things. Neuroscientists at UC Berkeley, confirm that’s the case. Dr Daniela Kaufer runs a stress laboratory there. I asked her: “If we could switch off our stress response, would our stress ease?” Her answer was a categorical yes. If our stress response doesn’t engage, we won’t experience the effects of stress. That means despite all the challenges, pressure, deadlines, and rush, if we switch off our stress response, we won’t get stressed. In fact, all the things that we think cause stress might not be the reasons we feel it at all. Biologically, our stress response is supposed to kick in when our life’s in danger. Yes, deadlines, to-do lists, the IRD, mortgagee sales, hectic schedules, and 84 JuNO / SPRING 2017

back-to-back meetings are exhausting, draining, even life-changing – but they are not life-threatening. Here’s our challenge – a massive change in thinking for the entire western world. But how can we switch off our stress response?

The role of biology There are three fundamental changes we need to make, and each of them is part of our physiology. We’re designed this way.

1. The breath switch Breath sends two critical messages to the body. The first, our diaphragmatic (belly) breath, is designed to tell our body’s nine biological systems, such as digesting food and sleeping, to function as they should. The second, our thoracic (chest) breath, is designed to disengage these functions, and to switch on our stress response: fight or flight. Put simply, your breath is the switch. Chest breath switches your stress response on. Belly breath switches it off. Full stop. It’s thought that more than 40 per cent of us breathe mainly into our chests, giving us an ongoing sense of agitation and anxiety. We’re operating with our stress response always switched on. Solution: Practice breathing into your diaphragm, so that it becomes natural – even when you’re working at speed.

2. The thoughts switch The human is the only one of the world’s mammals whose thoughts trigger the stress response.

W E LLBE ING

An optimistic, constructive thought triggers critical thinking, decision-making, memory, and information processing. You can manage your emotions and take control. But a negative, worrying thought triggers your stress response, so you feel wired, tired, and easily frustrated. If you stay this way, your brain automates these thought patterns, making them hard to break. Solution: Try making your thought patterns more constructive, rather than thinking about how challenging things are.

3. The digital switch Your brain uses ‘in-between’ moments to make sense of things, for example while you’re waiting for a meeting to begin, or for a taxi to arrive, or when the traffic lights are red. However, we’re reaching for our phones and devices in every spare moment. We’re not giving our brains the chance to make sense of what’s happening. So, we add to the daily pressure, and over time, when there are challenges, we become overwhelmed.

Solution: Avoid reaching for your phone in spare moments, and relax instead. Try a digital detox. www.sarahlaurielifestyles.com

Your breath is the switch. Chest breath switches your stress response on. Belly breath switches it off. Full stop.

YOUR WORLD’S A BETTER PLACE

WITH GO STRESS REMEDY Feeling stressed and frazzled?

You’re not alone. Today’s lifestyle is busy and can often feel like a juggling act. GO Stress Remedy is here to help bring balance in your life and promote calm, good mood and release tension. Ease the worries of your day with GO Stress Remedy. Always read the label and use as directed. If symptoms persist consult your Healthcare Professional. GO Healthy NZ, Wellington Proudly made in New Zealand from select imported ingredients.

gohealthy.co.nz

YO U R LIFE STY L E

Treasures of the inca

T R AVE L

The vanished Incan empire left behind a remarkable legacy, writes Ute Junker â&#x20AC;&#x201C; its stunning cities, with the magical Machu Picchu as its most awe-inspiring.

YO U R LIFE STY L E

HIRAM BINGHAM had to do it the hard way. When in 1911 the American scholar and adventurer rediscovered Machu Picchu, the Incan citadel in the clouds, he did so largely on foot, occasionally sitting astride a mule.

The true treasures of the Inca, however, were their cities. Enormous resources went into constructing outposts such as Machu Picchu, which is perched spectacularly on a plateau with sheer drops on several sides, protected by a surrounding ring of mountain peaks.

Heading out from the Peruvian city of Cusco in search of forgotten Incan cities, Bingham and his team scrabbled up steep slopes and edged their way through plunging valleys, often hacking paths through dense jungle. It was clearly exhausting: when he was later asked the city’s precise location, he testily described it as being in “the most inaccessible corner of a hard-to-reach section of the central Andes”.

Huge amounts of stone were needed to construct the city, using the distinctive Incan dry-stone technique to seamlessly fit the massive blocks together. How the materials were transported to the site remains unclear, as does so much else about the city.

Abandoned city Still, Bingham found what he was looking for. Sprawling over 13 square kilometres, the abandoned city of Machu Picchu, a remote outpost of a vanished empire, captured the imagination of people around the world. A century on, it is one of South America’s best-known tourist attractions, and is so popular that the Peruvian government has had to limit tourist numbers to 2,000 people a day. Fortunately, reaching Machu Picchu today is a relatively stress-free experience. All you have to do is climb aboard the opulent train Belmond Hiram Bingham, named after the site’s discoverer. The train evokes the golden age of rail with its elegant interiors and immaculately turned-out staff, and covers the 80 kilometres between Cusco and Machu Picchu in around three-and-a-half hours.

Champagne and scenery That gives you plenty of time to enjoy a three-course gourmet brunch, complete with champagne served in fine crystal glasses. Thanks to the expert guides on board, you can also learn about the Inca and their remarkable empire, even as you drink in the magnificent views of terraced farmlands, raging rivers, and untamed jungle unfurling through the picture windows. The Inca ruled over one of the greatest empires the Americas has ever seen, one that they built up over little more than a century. By the 1500s, their territory was so vast that they had to set up a second capital at what is now Quito, in Ecuador. At its peak, it is estimated that the Inca ruled over a population of around 10 million people.

A dynasty of gold and jewels Like any great empire, the Inca controlled immense wealth. The emperor showed off his power through magnificent costumes, including a coat covered with jewels and pieces of turquoise, gold shoulder pads to match his gold bracelets and earrings, and a royal badge of hummingbird feathers framed with gold. 88 JuNO / SPRING 2017

Expect to spend several hours exploring this vast site – more, if you succumb to the temptation to keep snapping selfies in this jaw-dropping setting. Your guide will lead you through the remains of palaces and temples, warehouses and homes, showing how this complex society was ordered. The day ends with a return to the train. There you can savour the South American classic cocktail, a pisco sour, while waiting for dinner to be served.

Ancient strongholds Machu Picchu may be the most famous of the Incan cities, but there are others to experience in the area. Add the ruins of Vilcabamba, the last stronghold of the Inca, to your itinerary, along with Ollantaytambo, where the massive terraces of Temple Hill give you a sense of the scale of Inca construction. However, it is the former Incan capital, Cusco, that sits alongside Machu Picchu as the essential Incan experience. Unlike Machu Picchu, which was never discovered by the Spanish, the grand city of Cusco fell to the conquistadors, led by Francisco Pizarro. The Spanish were dazzled by the wealth of the imperial capital, most notably the Qorikancha complex, home to Cusco’s most important temples. The perimeter wall was said to be studded with emeralds, and the Temple of the Sun was lined with 700 sheets of gold, each weighing 2 kilograms.

Spanish marauders The Spanish stripped the gold from the buildings and razed many of them to build their own churches and palaces. However, they used the strong Incan foundations as a base for their own buildings; the church and convent of Santo Domingo, for instance, are built on top of the ruins of Qorikancha. It may have been intended as a show of power over the defeated locals, but it can also be seen as a tribute to the achievements of the vanquished: after all, the conquerors’ most glorious buildings rest on the enduring achievements of the Inca.

SPRING 2017 / JuNO 89

YO U R LIFE STY L E

MEDITERRANEAN DREAMS

A meal at Gerome in Parnell, Auckland takes Brenda Ward back to a delicious shared feast in an orange grove in Greece.

As I slip a tender sliver of lamb with a creamy smear of yoghurt and pinenuts into my mouth, for a moment I could be in another place, many years before. It was winter but the sun over the orange orchard near Nafplion in the Peloponnese was warm. We had been picking oranges, and our hands were sticky with juice. Our lunch was lovingly spread out by the black-clad yiayia (grandmother) and her daughters, on a long table under a bower. Newlyweds on our OE, my husband and I were with a band of colourful tourists from around the world, gathered around a peasant-style feast of crisp-crusted roast lamb, olives, salad, macaroni tossed in meat juices, and retsina wine. Then another mouthful brings me back to Auckland, to an elegant vaulted room with a buzzy vibe. This taste is a juicy explosion of compressed watermelon that brings unexpected freshness, offsetting the richness of the meat. Yes, this food is Greek, but at the same time, it’s not; honouring its Mediterranean heritage but fusing an ancient cuisine with modern flavours. 90 JuNO / SPRING 2017

I’m sitting in a turquoise velvet banquette on the ground floor of the hottest new restaurant in Auckland, Parnell’s Gerome – and it’s our wedding anniversary dinner. This is just how owner Ramiz Malik wants his restaurant to be. “Here I want people to have their birthdays, anniversaries, keep their memories, and make whole new memories, with my signature.” Tipped by many to be the restaurant that will reinvigorate Parnell, Gerome has emerged as a sophisticated dining venue with a casual ambience, on the site of the former Iguaçu. Malik says it was the Iguaçu space that called him back to Auckland from Sydney. The restaurateur, who owned two Aubergine restaurants, one in Takapuna, one in Sydney, says Iguaçu was the first restaurant he’d visited when he flew into Auckland from London. “I spent a lot of time in the bar, dined here a lot of times, I love this restaurant! This place, for me, is not just a place where people eat and drink. A restaurant is more about memories, energy, family – this is what I believe.”

Italian tiles, marble tables, a Bang & Olufsen sound system, individually adjustable air-conditioning under your seat, Riedel glassware, a Gordon Ramsay-trained chef who’s worked in Paris . . . there are no compromises here. “You are not a customer, you are my guest and this is my house,” says Malik. The sexy bar is caged in brass rails, and for a relaxed after-work snack, you can dine at a leaner. The top level is more intimate, including a private room; courtyard dining is al fresco, with olive trees and a canopy. At the table next to ours sits a group of Parnell residents. They were sceptical but have taken the advice of their waiter, with a trio of plates to share. They’re beaming. “We’ll be back!” they say as they leave. “Happy anniversary!”

Loukoumades

(GREEK DOUGHNUTS)

Makes roughly 20 small doughnuts

These are perfect with a scoop of vanilla ice cream. For maximum flavour, it’s essential to use fresh yeast. Doughnuts 75g sugar

“Your anniversary?” says our waiter. Two flutes of champagne appear as we order the loukoumades, with a chocolate-nut sauce, coffee ice cream, and shattered hazelnuts.

225g full-fat milk

One mouthful of the dessert and we’re transported once more back by the Med, sharing a sticky doughnut-style dessert in a smoky little kafeneío.

480g plain flour

We too remember this place when it was ‘the Alex’ pub, where we’d listen to the Sunday jazz in the courtyard, then Iguaçu, filled with media types and stockbrokers on long lunches.

22g fresh yeast 75g unsalted butter Pinch of salt 3 egg yolks Sauce 100g Nutella

No longer a kitschy ‘colonial’ village, as we walk past the galleries and boutiques, we see that Parnell is maturing.

100g honey

Says Malik: “I feel Parnell is like Europe when you walk down the street. It’s not like it was. I’m putting all my passion, my love into it.”

1. Heat the sugar and milk slowly until the sugar dissolves (about 5 minutes).

www.gerome.nz

2. Crumble the yeast into a bowl and pour over half the milk mixture. Whisk yeast to dissolve.

20ml water

3. Add the butter to the other half of the milk mixture, and melt.

4. Sift flour and salt into a clean bowl, then make a well in the centre. Add egg yolks and both milk mixtures and bring everything together gently to make a dough. Don’t overwork the dough or it will toughen. 5. Place in a clean, floured bowl for 90 minutes, cover and leave to proof. 6. ‘Knock back’ the dough and roll into a rectangular shape. Cut into small squares, cover and leave to sit for 30 minutes, to rise. 7. To make the sauce, heat all ingredients together. 8. Deep-fry doughnut squares in canola oil or another neutral-based oil until golden and cooked through. The loukoumades should sound hollow when tapped. Serve with the sauce.

YO U R LIFE STY L E

Blunt Lite umbrella in yellow bluntumbrellas.com

Brompton H3 folding bike in Lime Green bicyclejunction.co.nz

SPRING Surprise! The cleverest, most colourful things expand from small packages to brighten your days, as the seasons change.

Marimekko Unikko notecards boltofcloth.com

Foldable silicon bowl foldabowl.com

Samuel Ashley Brooklyn backpack in red and navy samuelashley.com

Hightide Field roll pen case in navy ikoiko.co.nz

Samuel Ashley Niko pouch in pink samuelashley.com

MYCANOE 2.5 folding canoe oricanoe.com

COAST leather glasses case coastnewzealand.com

Womenâ&#x20AC;&#x2122;s LSD running jacket in red brooksrunning.com

Honeywrap cotton beeswax food wrap honeywrap.co.nz

YO U R LIFE STY L E

BOOK REVIEWER Sarah Ell

Henriques covered the unfolding story for The New York Times, and interviewed more than 100 people involved in the scandal, including Madoff himself. T H E W IZ A RD O F L IE S: B ERN IE M A D O FF A N D T H E D E AT H O F T RU S T

BY D I A N A B . H EN RI Q U E S

$35

Few people knew what a Ponzi scheme was until New York financier Bernie Madoff’s gigantic-scale fraud came to light in 2008. Obviously, among those who had no idea were the hundreds of investors who Madoff defrauded over the years, before his deception was revealed by the global financial crisis. Diana Henriques’ book, first published in 2011, has been updated and re-released to coincide with the HBO telemovie based on Madoff’s story, starring Robert de Niro, and Michelle Pfeiffer as his long-suffering wife Ruth (screening on Sky’s SoHo channel). Henriques covered the unfolding story for The New York Times, and interviewed more than 100 people involved in the scandal, including Madoff himself. It’s a sobering tale – not only about how the fraud was perpetrated on innocent investors, but also how regulators looked the other way, or had the wool pulled over their eyes. She says one of the biggest lessons to come out of the whole sorry affair is “how diabolically difficult it is for regulators to protect the public in the 21st century” – especially from themselves.

94 JuNO / SPRING 2017

Henriques details the snowballing effect of Madoff’s fraud, which had its roots way back in the 1960s, and how the lives of so many people were affected. She also sheds light on Madoff’s character. Madoff started as a legitimate and successful broker, but he was fuelled by greed. His shady dealings grew in size and value as he increasingly moved money around to cover losses, constantly robbing Peter to pay Paul. On the day of his arrest, Madoff was supposed to be managing nearly US$65 billion of other people’s money – but, in fact, most of it had vanished. “I always wanted to please people – that was a weakness I had,” Madoff tells Henriques. “It starts as a very simple thing, and then becomes complicated.” Henriques’ portrait of Madoff and his crimes is both readable and sobering, a warning to all those who invest without due diligence. She reminds us that, even as we read this, the next Bernie Madoff is working his dark magic somewhere in the world.

BOOK R E VIE WS

> We have one copy to give away of David Werdigerâ&#x20AC;&#x2122;s book. Go to www.junoinvesting.co.nz/competitions

Werdiger looks at the intergenerational issues which might arise, including the adage that the first generation establishes a business, the second generation builds it, and the third generation sells it or loses it. T R A N S I T I O N : H OW TO PREPA RE YO U R FA M ILY A N D B U S IN E S S FO R T H E G RE AT E S T W E A LT H T R A N S FER IN H I S TO RY

BY DAV ID W ERD I G ER

US$16.93 (through Amazon)

More than half the businesses in New Zealand are substantially or solely family-owned, which means all of them, sooner or later, must face the issue of succession. But transitioning a company into the control of a new generation can cause major problems, both financial and emotional. Statistics show only 40 per cent of businesses survive into their second generation, and 90 per cent will have failed by the third generation. Werdiger is an Australian author and founder of a telecommunications billing software company. His interest in family succession planning is personal, because he has recently worked with his family to manage the transition of his fatherâ&#x20AC;&#x2122;s fabric trading business to the next generation.

Werdiger looks at the intergenerational issues which might arise, including the old adage that the first generation establishes a business, the second generation builds it, and the third generation sells it or loses it. He believes this pattern is avoidable, if the people inheriting the enterprise are given the right tools, education, and guidance. He dedicates a chapter to the fraught issue of raising children with wealth, to understand the value of money, and be financially literate, despite having access to generous resources. Transition is a reasonably short book, but it covers some important issues which family business-owners and anyone who is able to pass on wealth need to consider.

In this book, he discusses the challenges and opportunities created by multiple generations being involved in the same family business.

It comes with a free-downloadable Transition Workbook (on davidwerdiger.com/transition-workbook). The workbook contains practical exercises to help business owners and families work through the issues involved in their own situation.

As he points out, this is the first time in history that four generations of one family might be alive at the same time, and this leads to differences in attitudes and understanding.

www.davidwerdiger.com

SPRING 2017 / JuNO 95

Give a gift subscription of JUNO to a friend or loved one and be in to win. COAS T MA RINE BE A N CHA IR , A WEEKENDER A ND PICNIC BAG . Enduring but timeless, every COAST beanbag and bag is handmade in New Zealand from the highest-quality fabrics and components and guaranteed to last. Classic styles, built to endure, allowing you to escape every day.

Winners can choose from a selection of colours.

www.coastnewzealand.com 77 Ponsonby Road, Auckland

A great gift idea

Visit www.junoinvesting.co.nz to subscribe Subscription price includes GST and postage within New Zealand.

Subscribe for four issues for only $35 for yourself or a friend and be in to win a COAST Marine Bean Chair ($699), a Weekender bag ($449) and Picnic bag ($449). Keep them, or give as a gift. Winners drawn 31 October.

MAR KE T INS IGHT S

TIMELY, CONCISE, ORIGINAL RESEARCH We are an award-winning provider of independent macroeconomic and financial markets analysis, and forecasts.

Our independent status allows us to produce impartial analysis, delivering the original insights our clients need to develop the best possible strategic plans and investment decisions.

We offer comprehensive global coverage across 27 subscription services, ranging from timely data- and event-driven notes, to longer thematic pieces.

Our Consultancy team provide cutting-edge research to address specific issues or problems that our clients face.

OUR CLIENTS MAKE BETTER DECISIONS, MORE QUICKLY

www.capitaleconomics.com businessaustralia@capitaleconomics.com

CHART REVIEW

Battles in the Sky Mike Taylor CEO/CIO, Pie Funds

A KEY THEME this millennium has been how new technology is radically changing our lives. For example, how did we all survive before smartphones? They seem an integral part of our lives, but 10 years ago nobody had one.

Sky TV has fallen around 30 per cent, whereas Netflix is up a staggering 1,400 per cent over the same period. Netflix now has a market cap of US$66 billion and Sky TV is valued at NZ$1.3 billion (as at 30 June, 2017).

The fast pace of technological change is affecting businesses, too. In 1965, the average tenure of companies on the S&P 500 was 33 years. By 1990, it was 20 years, and it’s forecast to shrink to 14 years by 2026.

In a world where technology is making some businesses obsolete within a few years, a logical conclusion from this would be that the trend for Sky and Netflix probably has further to run.

Netflix is one company that’s accelerated its way to being one of the world’s largest companies in a short time. In fact, in recent times Netflix has started earning more profit than New Zealand-listed Sky TV. However, the fortunes of the companies’ share prices have been diametrically opposed over the past five years.

Like Amazon, Netflix has a history of killing businesses. Remember Blockbuster? At its peak in 2004, the company had more than 9,000 stores globally and dominated its space. By 2010, the company had filed for bankruptcy. As we can see from the chart below, riding the wave of a new technological change can be very profitable.

Netflix has disrupted the satellite television industry, and the results have been spectacular, writes Mike Taylor.

FIGURE 1. Netflix versus Sky TV share price percentage change FIGURE X. NETFLIX versus SKYTV share price percentage change 1406%

1500%

Netflix

Skytv

1200% 900% 600% 300%

-34%

Jul 2012

Jul 2013

Jul 2014

Jul 2015

Jul 2016

Jul 2017

Source: Capital IQ

The opinions expressed by Mike Taylor in this Chart Review are his own and not those of Pie Funds and should not be attributed to Pie Funds.

SPRING 2017 / JuNO 99

STOCKS ON THE MOVE Chris Bainbridge and Mark Devcich provide a backdrop to the rises and falls of four stocks on the Australian and New Zealand exchanges.

SMALL CAP

Pepper Group Limited

Bingo Industries Limited

[ASX: PEP]

[ASX: BIN]

Business description

Pepper is a non-bank financial lender and mortgageservicing business with operations in Australia, Asia, and Europe.

Bingo Industries is a waste-management and recycling company, based in New South Wales (NSW).

Movement During July 2017, Pepper received a takeover offer from KKR, a US private equity firm. Before the bid, speculation in the press about a takeover offer saw Pepper’s share price increase by more than 25 per cent. This forced Pepper to confirm that it had received a preliminary non-binding proposal from KKR at AU$3.60.

What’s happened? Since then, Pepper announced it has acquired Portuguese consumer bank Banco Primus for AU$95 million, subject to regulatory approval. The acquisition could subsequently allow Pepper to take deposits in Spain and Portugal.

What next? In another development, the Australian Treasury released some draft legislation for consultation, giving the Australian Prudential Regulatory Authority (APRA) new powers to regulate non-bank lenders. This may mean that non-bank lenders in Australia will have lending restrictions imposed, similar to those that apply to deposit-taking banks. It’s too early to know how this will affect Pepper in its domestic market. As the directors own a substantial number of Pepper shares, it’ll also be interesting to see whether they tender their shares into the takeover offer, or choose to partner with KKR and remain as shareholders.

It operates a network of 10 well-located resourcerecovery and recycling centres, mainly across metropolitan and greater Sydney. The centres are supplied with building, demolition, commercial, and industrial solid waste from both its own fleet of 180 vehicles and 17,000-plus bins, and resources from a number of competitors in the collections industry.

Movement Bingo listed on the Australian Stock Exchange in May 2017 at AU$1.80 and has performed well, closing at AU$2.06 on 28 July 2017, up 14 per cent.

What’s happened? The company is in a good position to benefit from increasing environmental concerns, population density, and strict NSW-regulated recycling targets. The industry remains highly fragmented and unsophisticated, which has allowed Bingo to grow by acquiring rivals and taking market share. It achieved a compound annual growth rate (in EBITDA) of 61 per cent, over three financial years (2015 to 2017). Forecasts for 2018 don’t include any wins in volume growth arising from collections, acquisitions, interstate expansion, or reprocessing.

What next? The market will be watching closely to see whether Bingo achieves its 2017 financial year prospectus forecasts, and its outlook statement for 2018.

MICRO CAP

Mitula Group Limited

Decmil Group Limited

[ASX: MUA]

[ASX: DCG]

Business description

Mitula is a Spanish-based company that is listed in Australia. It operates search engines and portals for real estate, used cars, fashion, and job advertisements globally under different brands. Mitula’s main focus is real estate and it also runs a number of its own property sites in Asia.

Decmil Group Limited provides design, engineering, and construction services to the oil and gas, resources, government, and infrastructure sectors in Australia and internationally.

Mitula earns commission every time someone clicks on, for example, a real-estate listing and is directed through to the original website where it appears, such as TradeMe. Its second revenue source is from advertising on its own websites. It receives a commission from Google each time someone clicks on an ad.

Decmil closed at AU$0.76 on 28 July 2017, down 19 per cent during the month, after it downgraded its forecasts for the 2017 financial year.

Movement Mitula suffered a profit downgrade in July 2017. It projected adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) of between AU$12 million and AU$13 million. This was down on the previous forecast of AU$17 million to AU$19 million.

What’s happened? The decrease was due to slower growth than expected in visits to the Mitula-branded specialist (vertical) search sites, especially in the second quarter. Its websites were penalised by Google for loading slowly, which meant they appeared further down the search results. On the day of the downgrade, the share price dropped 45 per cent, but it has since recovered slightly.

What next?

Movement

What’s happened? The reasons given for the downgrade were delays to both construction start-dates on key projects and the award of new tenders in the second half of 2017. The company has also had to write-down the values of its Homeground worker accommodation and SC Holdings, the telecommunications services business that it acquired last year. Decmil’s 2017 results were expected to be messy. The new guidance of a break-even EBITDA result (before the Homeground write-down) is less than the market previously expected, but the important question is whether Decmil can stage a turnaround in 2018.

What next? Fundamental to any recovery is Decmil finishing the 2017 financial year in a solid net-cash position. And if strong tendering activity converts to revenue growth in the next 12 months, the company could be well placed.

The market will be looking at Mitula’s half-year results, which will be reported in August, to determine how much contribution will be needed in the second half of the year to achieve the full-year forecasts. Longer term, the experience shows how vulnerable Mitula’s business model is to changes in Google’s search algorithms. The company relies heavily on Google to keep traffic coming to its websites.

M ARK E T CAPITALISATION

AU S TR AL I A/ N EW Z EAL AN D

U N I TED S TATES

NANO CAP

Less than AU$25 million

Less than US$50 million

M ICRO CAP

AU$25 million–AU$150 million

US$50 million–US$300 million

SM ALL CAP

AU$150 million–AU$1 billion

US$300 million–US$2 billion

M ID CAP

AU$1 billion–AU$5 billion

US$2 billion–US$10 billion

L ARGE CAP

AU$5 billion–AU$50 billion

US$10 billion–US$100 billion

M E GA CAP

Greater than AU$50 billion

Greater than US$100 billion

SPRING 2017 / JuNO 101

SNAPSHOT A glance at events affecting the global economy (As at 3 Aug 2017)

The UK economy expands by only 0.3 per cent in the second quarter of 2017 as Brexit uncertainty bites.

Facebook, Apple, Amazon, Netflix, and Google (FAANG) stocks continue to hit new highs with the FAANG index up more than 50 per cent in the 12 months to 31 July 2017, and a staggering 40 plus per cent per annum over the past five years.

102 JuNO / SPRING 2017

Argentina has issued a US$2.75 billion 100-year government bond at 7.9 per cent. However, the country has defaulted on its debt eight times since gaining independence in 1816.

Trump versus Putin â&#x20AC;&#x201C; proposed US economic sanctions could significantly hamper the outlook for Russian growth.

After a 2012 EU bailout, the Spanish economy is back to its pre-crisis size. The unemployment rate is still running at 17 per cent, but down from a peak of 25 per cent.

A recent North Korean missile test showed its weapons are capable of hitting the US, yet investors continue to hold out for a diplomatic resolution, and financial markets showed no reaction.

Neighbouring Gulf nations (namely Saudi Arabia) have cut off diplomatic ties with Qatar, allegedly to curb terrorism. This diplomatic crisis has the potential to have a significant negative effect on economic growth in the region.

The AUD/USD is back to 0.80, its highest level since 2015, as expectations of US rate hikes this year fade to 2018.

SPRING 2017 / JuNO 103

YO U R INV E STIN G

MARKET INSIGHTS

Agribusiness: Grass-Roots Investing Jeremy Keating CBRE Agribusiness

The resurgence of the New Zealand rural sector is good for producers, communities, and investors explains CBRE’s Jeremy Keating.

AGRIBUSINESS in New Zealand is in a pretty good space right now.

The worst of the downturn in dairy is behind us, and sentiment is improving as forecast payouts increase. Farmers have shown resilience and bankers have been patient, trading through the rough patches in a fairly orderly manner. As dairy payouts translate into actual cash circulating in provincial communities, the flow-on effect will be positive. It will shore up balance sheets as well as being beneficial for those communities that were heavily reliant on dairy and really had to tighten their belts for a couple of seasons. Red-meat prices remained robust when dairy was languishing, which shows the importance of New Zealand not being too reliant on only one sector.

Fruitful sectors However, at the same time, horticulture, led by kiwifruit and wine, has been the standout. Kiwifruit growers have done an amazing job of coming back from the first Psa-V (Pseudomonas syringae pv. actinidiae disease) outbreak in 2010. So much so that orchards are now selling for record prices. Significant expansion is in the pipeline, underpinned by the release of further gold kiwifruit licences by Zespri. Kiwifruit achieved an impressive NZ$1.67 billion in export earnings in 2016. Meanwhile, the maturing viticulture sector exceeded NZ$1.55 billion last year, and is already this country’s sixth-largest export earner. After passing the NZ$1 billion mark in 2010, the New Zealand wine industry set itself a new goal of reaching NZ$2 billion by 2020. The focus will

104 JuNO / SPRING 2017

continue to be on wine quality, given the relative constraints of suitable land and irrigation to keep expanding the area under vines.

Snags in wool It’s the producers of cross-bred wool who appear to face the most challenges – with few obvious solutions on the horizon. Much of our fine merino wool has ready markets and it is turned it into high-end garments and activewear. But cross-bred wool producers are struggling to escape being price-takers. Stories in the press have revealed how farmers are stockpiling wool in their woolsheds and at the wool scourers, rather than accepting the low prices on offer.

Fresh growth In the day-to-day buying, selling, and valuing of agricultural real estate, we don’t see many ‘bargains’ out there, with a fairly good balance between buyers and sellers, and an informed marketplace. One area where we do see opportunity for future upside is in cutover forestry land – where the trees have been removed and the land needs a new owner to invest in establishing the next planting rotation. Many of these parcels of land are being sold by small-scale private investors who planted in the boom times of the early 1990s, and who are now cashing in for their retirement and don’t have the time or inclination to wait for another 27-year cycle.

Kiwi value proposition New Zealand will always face the challenge of

MAR KE T INS IGHT S

After passing the NZ$1 billion mark in 2010, the New Zealand wine industry set itself a new goal of reaching NZ$2 billion by 2020.

SPRING 2017 / JuNO 105

YO U R INV E STIN G

being an exporting nation that is distant from our customers. Yet our agricultural products have and will continue to be highly sought after for increasingly sophisticated global consumers. We need to keep investing to produce branded, higher-value products that come from an environmentally sustainable production process, mixing this expertise with Kiwi know-how and resilience – and telling this story as part of the process. We can also keep trying to weave together our tourism, food and beverage production, and hospitality offerings to ensure a world-class visitor experience. This gives producers the chance to engage directly with their customers and forge closer and more direct ties.

Investment pathways

DEFINITIONS AG R I B U S I N E S S : A commercial business that earns most of its revenue from agriculture. C U T OV E R L A N D : Forestry land where the

timber has been felled and removed. G E A R I N G : Taking on debt to fund growth. P R I C E -TA K E R : A supplier that is forced to take

prevailing (low) prices for its products. W O O L S CO U R I N G : Washing greasy (shorn)

wool to remove contaminants, prior to processing. ZE S P R I : The world’s largest marketer of kiwifruit, working with growers and distribution partners to source and supply kiwifruit.

106 JuNO / SPRING 2017

Options for investing in agriculture range from direct farm ownership through to small-scale syndicates organised through accountants and solicitors, to structured and fully managed syndicates. Among these is MyFarm, which has grown to have more than NZ$500 million of rural assets under management. Investors need to understand that a number of variables can affect agribusiness returns. Factors such as weather, commodity prices, and exchange rates mean it’s important to take a long-term view, and to recognise the cyclical nature of the investment and limit gearing. If you’re prepared for these things, significant satisfaction as well as good financial returns can be gained from being a part of New Zealand’s enduring agricultural success story.

The views expressed are those of the author and not CBRE.

LIVE THE HIGH LIFE OR ASTUTE INVESTMENT

AU C K L A N D ’S B E S T A D D R E S S , T H E PAC I F I C A O N LY 1 0 % D E P O S I T - N O F U R T H E R PAY M E N T S U N T I L Q 4 2 0 2 0

•

Fantastic rental yields from 4.7% - 5.1%

•

High rental demand from quality tenants

•

Excellent value for money

•

Tax effective investments

•

Facilities such as residents’ private cinema, lounge and library, heated pool

1 Bed 57m2-84m2

with spa, sauna, steam room & gym

2 Bed 83m2-116m2

•

24 hour concierge and valet parking

3 Bed 125m2-204m2

•

Low body corporate costs

Penthouse 175m2-235m2

•

Spectacular views of the Hauraki Gulf and Cityscape

•

Award winning builders Icon Co start construction October 2017

•

from

$725,635

from

$1,281,635

from

$1,893,635 from

$3,500,000

S H OW SU I T E O P E N DA I LY 11 A M - 4 P M L E V E L 9, 1 5 2 Q UAY ST R E E T, AU C K L A N D (O P P OS I T E S H E D 1 0 )

To be completed by Q4 2020

C B R E ( AG E N CY ) LT D L I C E N S E D R E A L E STAT E AG E N T ( R E A A 20 08)

YO U R INV E STIN G

MARKET INSIGHTS

KEVIN MORGAN Title

How to Manage Risk When Trading Having a risk-management strategy is essential in business. And in the fast-moving environment of financial markets, it’s even more important, says Chris Smith.

Chris Smith CMC Markets

ONE OF THE KEY differences between an individual (retail) trader and a professional is how they approach a trade.

The retail investor is most often focused on getting into a trade, while the professional understands that managing risk holds the real key. In fact, being a professional trader is more about managing risk than it is about being able to correctly predict the direction of the market. Surprisingly, some of the big names in the trading world get the direction wrong more often than they may get it right. It’s only through their riskmanagement abilities that they’re able to safeguard their profitability. Their risk strategies protect them from large losses and allow them to compound their net gains over time. The general perception of trading is that it’s a fastmoving, high-stakes, winner-takes-all environment. That may be true to some extent, but actually there are a wide range of traders with different approaches and time frames – from minute-by-minute price scalpers, to more strategic, theme-based, global macro traders. Traders do differ from the traditional ‘buy and hold’ investor, but the gap between these two worlds has narrowed over recent years. The length of time for both the average fund and the investor to hold shares is reducing, with more flexibility to holdings. Traders and investors are often exposed to similar risks too. Take, for example, liquidity risk.

Liquidity risk At this point in the market cycle, there are plenty of articles and headlines on market risks and ‘inflated’ valuations of stocks.

108 JuNO / SPRING 2017

However, investors may be unaware of the ‘concentration risk’ within their holdings – the risk that their portfolio has too many of the same categories of shares and exposures. In the broader share market, much of the strong performance of individuals’ and money managers’ portfolios comes from only a handful of stocks. For example, Amazon, Facebook, and other tech darlings, which have enjoyed spectacular growth and high index weightings. So, investment risk is increased by many fund managers having disproportionate weightings to these stocks. These crowded trades are a concern, because investors could face big losses if the markets were to revert to more historical valuations and traders all start heading for the same exit. The ever-growing popularity of exchange-traded funds (ETFs) is also a worry. Famous investor Carl Icahn first raised warnings about the dangers and limitations of them in a 2015 video post. ETFs track an index, a commodity, bonds, or a basket of assets, and are traded on an exchange. Investors in ETFs often haven’t given much thought to the potential lack of liquidity of these funds. Steep losses can be incurred through a lack of buyers, when investors decide to sell and want to move out of these funds.

Assess all outcomes Traders and investors should always consider the downside before entering into any new trade. Too often, the trader’s focus is on the gains they could make. They overlook the pitfalls that could occur if they get the direction wrong. This process of looking at the gains first feeds insidiously into our natural tendencies

“

MAR KE T INS IGHT S

Risk is high and prospective returns are low….I believe this is a time for caution. – Howard Marks

”

– to act on what gives us pleasure and to avoid the pain. This makes retail traders and investors more impulsive.

invest no more than 2 per cent of available capital on any one position – as the portfolio grows, the 2 per cent increases in proportion and position size.

Position sizing

For example, a trader with $100,000 trading capital should risk no more than $2,000 – or 2 per cent of the value of the account – on a position, or multiple positions.

When it comes to trading in the financial markets, choosing the size of your ‘position’ (the amount you invest) in a stock is different for everyone. Position sizing is one the most important elements of any strategy for long-term success. It varies based on an investor’s risk profile and appetite, their expectations for returns, their wealth, and the diversification of their portfolio. However, there are statistical limits to trading safely. The ‘2 per cent rule’ is a commonly used technique by both new and experienced traders. The strategy is to

This risk-management technique does limit the speed of growth in a portfolio and requires discipline to follow and stay within the boundaries of a trading system.

The VIX ‘fear gauge’ Since its inception in 1993, the CBOE Volatility Index, often known as the VIX, has become a popular tool to gauge investor sentiment and the level of risk in the market.

SPRING 2017 / JuNO 109

YO U R INV E STIN G

FIGURE 1. CBOE Volatility Index (VIX)

80.06

9.62

Financial Crisis

24 year low

45.29 Russian Financial Crisis

45.79

41.76

Financial Crisis

40.74

9/11 Terror Attacks

Dow drops 1,000 points

1993

1997

2001

2005

2009

2013

2017

Source: Factset

The VIX is derived from option prices on the S&P 500 – the most globally traded and widely followed stock index in the world. It reflects the market’s expectations of volatility over 30 days. Currently, global markets have been showing increasing levels of complacency, with overall risk tolerance increasing in many asset classes. The VIX is currently at a record low (see Figure 1), despite markets being faced with volatility in world news and events.

Prevailing complacency

Traders are often perceived as big risk-takers. The truth of the matter is that the ‘wizards’ of the trading world, as described in Jack Schwager’s book, Market Wizards, share a common trait: they’re actually very risk-averse. They understand that to earn a return, you have to take risk. But they’ve learnt to effectively manage this risk. That’s their true skill as traders.

DEFINITIONS CO N C E N T R AT I O N R I S K : Over-concentration

However, investment banks have been commenting on risks for investors, with Goldman Sachs research warning: “There is elevated valuation on almost every metric within the US stock market.”

can happen when one segment of a portfolio performs better than the rest. As the asset grows, it becomes a bigger proportion of the investor’s portfolio.

And well-known investor Howard Marks of Oaktree Capital’s latest memo noted: “Risk is high and prospective returns are low…I believe this is a time for caution.”

L I Q U I D I T Y: The speed and ease at which an asset can be bought or sold.

Financial markets will often be irrational from the historical average for much longer than expected, and do not care about expert forecasts and analysis. Sentiment can change without notice though, so having risk-management protection tools and position-sizing techniques in place allows you to be flexible when opportunities arise.

110 JuNO / SPRING 2017

M A R K E T W I Z A R D S : Author Jack Schwager

interviewed the greatest hedge-fund managers of the last three decades for his book Market Wizards. O P T I O N : The right (but not an obligation) to buy

or sell a share at a certain price. P O S I T I O N : An investment in a share, or a

number of shares.

MARKET INSIGHTS

Is Inflation About to Take Off? Andrew Kenningham Capital Economics

MUCH HAS HAPPENED since the global financial crisis (GFC) nearly a decade ago: a deep recession, a banking crisis, a huge rise in unemployment, an increase in public sector deficits, and threats to the survival of the eurozone.

However, the world economy is now largely back to normal. Government deficits have fallen, the banks have been rescued and, Greece apart, even the eurozone seems to be in good shape. Perhaps the most encouraging development is that the unemployment rate in many countries has fallen to its lowest level for several decades. In the UK and US, it’s just 4.5 per cent; in Germany it’s 4 per cent, and in Japan it’s below 3 per cent.

Inflation still low However, one thing that isn’t back to normal is inflation. Admittedly, the threat of outright deflation has faded. But prices in the major advanced economies rose by less than 1 per cent last year, and they look set to rise by only about 1.5 per cent this year and the next. This is despite central bankers printing a whopping US$10 trillion since 2009. So why has inflation remained so low? Two rather different explanations have surfaced.

1. Still a lot of hidden unemployment… The most common explanation, which fits most easily with conventional economics textbooks, is that the world economy is not as healthy as it appears.

Some evidence supports this view. For example, despite the low official unemployment rates, many people are working fewer hours than they would like, and others have given up looking for work. It’s also possible that unemployment could fall to lower levels than in the past, before generating much inflation. The increased uptake of higher education may have reduced the number of people who are ‘unemployable’. Use of the internet to advertise and search for jobs may have made it easier to match vacant positions with people. And changes in policy have increased incentives to work. If this explanation is correct, unemployment may continue to fall, and we can hope for a year or two more of strong growth. But eventually inflation should start to pick up.

2. …Or is inflation now a thing of the past? The other more intriguing explanation is that inflation has been killed off indefinitely by several fundamental changes. It’s well known that the bargaining power of labour has been reduced because trade union membership has declined, technology has displaced people in many occupations, and globalisation has allowed employers to shift jobs overseas. What’s more, modern service-sector companies, such as Facebook or Amazon, can expand their turnover without taking on many additional workers. Other developments in the labour market have also reduced upward pressure on wages.

SPRING 2017 / JuNO 111

YO U R INV E STIN G

If inflation does pick up, central bankers would raise interest rates and this in turn would push up the cost of mortgage payments.

In the US, the proportion of employees who don’t have permanent contracts has increased from around 10 per cent in 2010 to 16 per cent today. This includes musicians who perform the occasional gig and numerous independent consultants and freelancers. In addition, more people are on zerohours contracts. These workers are less able to push for wage rises than full-time, trade union members working in traditional industrial occupations.

Dilemma for policymakers It’s possible, therefore, that we’re now living in a lowinflation world. So, why would that matter?

Dilemma for households Inflation also matters for ordinary citizens and it creates a dilemma for households. If inflation does pick up, central bankers would raise interest rates and this in turn would push up the cost of mortgage payments and increase returns on bank deposits. It could also lead to falling bond prices or trigger a slump in property and equity prices. In these circumstances, households should be cautious about both borrowing and investing. You might want to keep your money in the bank.

It would create a dilemma for policymakers. Central bankers have almost universally been puzzled by the combination of strong economic growth and sluggish inflation.

On the other hand, if inflation remains low indefinitely, mortgage rates will also stay low and there’s a greater chance that asset prices – be those bonds, property, or equities – will remain high, by historical standards.

They’re wary of tightening monetary policy, because this could kill off the recovery. But they don’t want to keep interest rates too low, because that could fuel excessive risky lending and feed asset-price bubbles.

In these circumstances, the biggest risk for individuals is being too cautious and missing out on the gains to be had from investing in property or financial assets.

112 JuNO / SPRING 2017

MARKET INSIGHTS

South Korea – Riches and Risk Victoria Harris Pie Funds

South Korea has a booming economy, plenty of innovation and improving corporate practices, yet on the face of it, its share market appears cheap. Victoria Harris looks at what’s going on there. SOUTH KOREA is home to world-class companies like Samsung, LG, and Hyundai. It has a population of more than 50 million people and is one of the world’s wealthiest countries. However, its share market is one of the cheapest in the world.

South Korea’s major stock index, the KOSPI, has one of the lowest price-to-earnings (P/E) ratios among other global indices, which makes it highly attractive to investors. When compared to indices in other countries, the KOSPI is trading at a 9.5 multiple, a giant 50 per cent discount on the S&P 500 and a 39 per cent discount on the average of its peers’ P/E ratios (see Figure 1).

So why does South Korea trade at such a discount?

Chaebols and crime Many investors remain wary of South Korea, given its history of poor corporate governance and shareholder disregard. The massive, complex, family-owned corporate entities known as ‘chaebols’ have historically had a bad reputation and have been linked to white-collar crime. The cross-shareholding ownership structure of ‘chaebols’ is complex and private, and there are concerns about management being appointed by the controlling shareholders, who tend to ignore the interests of lesser shareholders.

FIGURE 1. Price-to-earnings ratios of major global stock indices as at July 31, 2017

Global P/E Ratios 2017

19.2x NEW ZEALAND NZX 50 19.2x 18.9x UNITED STATES S&P 500 18.9x 17.1x JAPAN Nikkei 225 17.1x CANADA TSX Composite 17.1x 17.1x AUSTRALIA ASX 200 15.9x 15.9x 9.5 x 15.3x UNITED KINGDOM FTSE 10015.3x SOUTH KOREA FRANCE CAC 40 15.1x KOSPI 15.1x EUROPE Euro Stoxx 50 14.8x 14.8x The KOSPI has one of SPAIN IBEX 35 14.7x 14.7x the lowest price-toearnings ratios CHINA CSI(P/E) 300 14.4x 14.4x when compared to other GERMANY DAX global indexes, making 13.4x 13.4x it very attractive to HONG KONG HK HSI 13.1x 13.1x potential investors. 12.5x BRAZIL Ibovespa 12.5x

NEW ZEALAND NZX 50 UNITED STATES S&P 500 JAPAN Nikkei 225 CANADA TSX Composite AUSTRALIA ASX 200 UNITED KINGDOM FTSE 100 FRANCE CAC 40

MEDIAN

EUROPE Euro Stoxx 50 SPAIN IBEX 35 CHINA CSI 300 GERMANY DAX HONG KONG HK HSI BRAZIL Ibovespa

SPRING 2017 / JuNO 113

YO YOU URR INV INVE ESTIN STING G

And recently, high-profile scandals have exposed corruption in the upper reaches of the Korean government, which has made investors wary.

Cheap, not perfect

But things seem to be changing.

The US market is one of the world’s most expensive – for a reason. Its transparency and the fact it’s home to a large number of fast-growing technology firms, such as Amazon and Facebook, make it highly attractive to investors.

New leader rings in changes The signs are that transparency in business and the robustness of corporate governance appear ready to improve. The country’s former president, Park Geun-hye, was recently impeached for corruption. The new administration is led by former human rights lawyer Moon Jae-in. He’s likely to push hard for laws to strengthen and enforce corporate governance, including broad reforms for chaebols. Moon is expected to carry out a number of measures, including regulations to better protect minority shareholders, and impose stronger anti-trust laws.

However, a cheap market doesn’t necessarily mean ‘buy’. You have to take risk into account.

The biggest risk associated with investing in the South Korean market is geopolitical – due to its volatile neighbour, North Korea. It’s difficult for investors to factor this risk into their valuation, as it will most likely be a black-and-white outcome. But as the chief executive of JPMorgan South Korea said: “Any correction due to North Korea issues usually provides a good buying opportunity.”

In growth mode

Also on the cards is a significant overhaul in the structure of South Korea’s largest investor in Korean equities, the National Pension Service.

The South Korean economy is doing well. Gross Domestic Product (GDP) is expected to grow 3 per cent this year, according to the finance ministry’s five-year economic policy outlook.

The country’s institutional investors will also become more proactive and vocal at annual meetings, with the UK’s Stewardship Code more widely adopted. The code is a set of guidelines issued by the UK Financial Reporting Council that aims to make fund managers and institutional investors more actively engaged in corporate governance in the interests of their clients.

Another sign of an attractive market is its ability to foster innovation and offer a platform for companies to raise capital. South Korea has one of the best environments for technology and has ranked first on the Bloomberg Global Innovation Index for five years in a row.

Low dividends South Korean companies’ payout ratios are some of the lowest in the world. The country’s historically conservative financial culture has meant that business managers are reluctant to distribute earnings as dividends. They prefer to use cash to grow and expand the business, rather than paying a return to shareholders.

Cash is king South Korean companies hold large cash balances. They like having the financial flexibility and extra protection that comes from having large amounts of cash on the balance sheet. This probably stems from their experience of traumatic crashes, such as the Asian Financial Crisis in 1997-98.

114 JuNO / SPRING 2017

This effect has flowed on to its capital markets, which have seen a 275 per cent increase in initial public offerings to 6.1 trillion South Korean Won (US$5.4 billion). This healthy business environment should see new, innovative companies continuing to emerge from South Korea. And despite the KOSPI Index being up nearly 20 per cent year to date, these market improvements aren’t yet fully reflected in that growth. The recent climb in the KOSPI was almost entirely driven by positive earnings revisions and increasing profitability, rather than underlying valuation reratings. An improving investing environment and capital allocation will continue to create tailwinds for the South Korean market. Just remember, at the end of the day, while South Korea looks attractive, like any investment, it isn’t without risks.

MAR KE T INS IGHT S

South Korea has one of the best environments for technology and innovation. The country has ranked first on the Bloomberg Global Innovation Index for five years in a row.

Diversify your investments offshore

pie growth UK & Europe fund Contact us now for more information

WWW.PIEFUNDS.CO.NZ

To download our Product Disclosure Statements and Statement of Investment Policy and Objectives visit www.piefunds.co.nz or www.companiesoffice.govt.nz/disclose. Past performance is not a guarantee of future returns. No person, including the Directors of Pie Funds Management Limited, guarantees the repayment of units in the funds or any return of units in the funds. Returns can be negative as well as positive and returns over different periods may vary.

14.4

TOTAL RETURN SINCE INCEPTION 1 NOV 2016 - 31 JUL 2017